Bigger, stronger, faster

Sygnis 19 September 2016 Update

Sygnis

Bigger, stronger, faster

H1 update

Healthcare equipment & services

19 September 2016

Price

€1.3

Market cap

€49m

€1.26/£

Cash (€m) at 30 June 2016

2.4

Shares in issue (1 August 2016)

37.3m

Free float

56%

Code

LIO1

Primary exchange

Frankfurt

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

4.3

1.6

(38.6)

Rel (local)

8.4

(5.6)

(38.9)

52-week high/low

€2.5

€1.1

Business description

Sygnis develops polymerases for the amplification and sequencing of DNA. It launched a directly sold web range of products in 2015, with more products due in 2016. It also uses distributors. Sygnis acquired Expedeon, a larger proteomics business with direct sales capability, in July 2016.

Next events

Q3 results

20 November 2016

Analysts

Dr John Savin MBA

+44 (0)20 3077 5735

Lala Gregorek

+44 (0)20 3681 2527

Sygnis is a research client of Edison Investment Research Limited

Following the acquisition of Expedeon, Sygnis expects to achieve profitability in 2017 if sales grow to about €7m; management is focused on achieving sales synergies and controlling costs. The acquisition was funded by issuing 20.54m shares at €1.10 each including a cash fund-raising of €5.3m gross. Sygnis produces innovative molecular biology kits, while Expedeon makes well-designed products for protein analysis. Expedeon has a UK- and US-focused, 13-person sales and marketing team and a five-year sales CAGR of about 20%. Integration and sales training will take most of 2016. Guidance on sales is expected in November 2016.

Year
end

Revenue
(€m)

PBT*
(€m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/14

0.39

(1.92)

(19.27)

0.0

N/A

N/A

12/15

0.56

(2.62)

(19.31)

0.0

N/A

N/A

12/16e

3.18

(1.01)

(3.79)

0.0

N/A

N/A

12/17e

6.90

0.73

1.94

0.0

67.0

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Expedeon financials and deal structure

The acquisition cost of Expedeon at the rights issue price of €1.10/share was €19.0m (£16.4m), about 4.6x its 2016e sales of €3.5m as guided by Sygnis, up from €2.5m in 2015. We estimate that sales of up to €1.7m will be consolidated in H216. Expedeon’s EBITDA margin in 2015 is stated to be 13% (about €325k), suggesting a purchase price of about 49x 2015 EBITDA. The margin may, we estimate, increase to 15% in 2016. The acquisition is crucial for the medium- to long-term profit potential.

Sygnis H1 results and rights issue

Sygnis reported €319k in sales in H116. The reported H116 net loss was €1.4m, down from a €1.9m loss in H115. The H116 cash outflow including capitalised R&D was €1.74m before other costs and capital expenditure of -€0.41m, giving an H1 cash use of €2.15m. Cash was €2.4m as of 30 June. Edison estimates year-end 2016 cash of €5m after the funding and acquisition. Sygnis issued 20.5m new shares in July, making 37.34m in issue; there were 16.53m in issue as of 30 June.

Valuation: Acquisition gives sold basis for growth

Our May 2016 forecast is for 2016 consolidated revenues of around €3.2m (€5m annualised), with the loss reducing to about €1.0m. Revised guidance is expected from Sygnis with Q3 results in November. At the current price the enlarged group market cap is €48.5m, about 7x our combined 2017e sales estimate of €6.9m. From 2017 onwards, sales synergies, growth and cost control could enable profitability. Expedeon has a strong OEM sales channel with Sigma and a Chinese deal with Tanon. These deals might offer further opportunities for Sygnis’s molecular biology products. Sygnis also plans to use its innovative molecular biology technology to enter the research market for liquid biopsy tests – tests for DNA fragments in the blood that can track and detect cancers. This could be a major product but is still in late-stage development.

Good strategic fit

The completion of the Expedeon acquisition has transformed Sygnis’s growth prospects although the full impact will not be visible until 2017 and 2018. Management has focused initially on controlling costs and integration of the businesses. Expedeon started selling Sygnis kits in June.

Sygnis’s core IP is a range of novel engineered enzymes for genetic analysis and genome sequencing. The two own brands are TruePrime and SunScript. TruePrime kits copy and amplify the whole genome before DNA analysis and gene sequencing. The SunScript kit converts short-lived RNA messages in cells into DNA for analysis or sequencing. The two kits can be combined effectively to give high-quality results.

Expedeon sells a diverse range of convenience electrophoresis products. The products offer good value through innovative features and are not discounted. Expedeon also sells other reagents for extracting and analysing proteins. There are 13 sales and marketing staff in total. Manufacturing is done in the UK and US.

The two types of product lines are often used by different types of researchers, although there may be a lot of overlap depending on the project. However, they will often be in the same research facility so it should be easy to add in extra sales calls and boost the sales per call as a result.

A product in late-stage development is a cell-free DNA kit for liquid biopsy for research use. This will look for fragments of cancer DNA in the patient’s blood. It will require some level of testing. It is possible that Sygnis’s range of novel enzymes will offer a performance advantage. The liquid biopsy area is growing fast but is still an immature market.

Sensitivities

In terms of the combined business, these are two different sets of expertise, so integrating the operations might not be straightforward. The long lock-up period of 18 months should delay any share overhang effect on the share price until late 2017. This lock-up also extends to major Sygnis shareholders (those owning more than 3%).

Valuation

Edison has not changed the valuation or forecast from May 2016 as there is no significant new data. Guidance on the progress of the integration and the potential sales in 2016 and particularly 2017 will be issued in November with the Q3 results.

The Edison forecast is for consolidated 2016 revenues of around €3.2m (Exhibit 1), with an estimate that Expedeon might contribute over €228k EBITDA (at a 13% margin) in 2016 (half year). We assume that Expedeon brings €500k in cash.

Exhibit 1: Highlights for 2016 comparing pre- and post-acquisition operational forecasts

2016 (€000s)

Sygnis pre-merger

Expedeon

Merged

Revenues

1,425.0

1,750.0

3,175.0

CoG

(69.3)

(402.5)

(471.8)

Operational costs

(3,195.0)

(1,085.0)

(4,280.0)

Operating loss

(1,839.3)

262.5

(1,576.8)

Source: Edison Investment Research. Note: For this exhibit we assume as if consolidated from 1 July 2016.

At a share price of €1.30, current at the time of writing, the enlarged Sygnis has a market capitalisation of about €48.5m, which would be about a 7x multiple on Edison’s annualised combined sales forecasts for 2017 of €6.9m. In 2017, sales synergies should be in place, direct sales of molecular biology kits could have risen and costs should have been rationalised, all of which might take the merged business to profitability. A trajectory of high-growth and controlled costs would give a very favourable profit outlook for 2018 and 2019, although at the moment it is too early to be clear about the longer-term prospects for the business.

Financials

Sales in H1 were €319k, up from €196k in H115. Operating expenses were €1.76m, down from €2.07m in H115 showing cost control. After minor tax and exchange rate movements, the H116 loss was €1.45m, down from €1.91m in H115.

Cash was €2.41m on 30 June, down from €4.56m on 31 December 2015; the cash outflow was €2.15m after an operating cash outflow of €1.51m, capitalised R&D of €0.22m and financing costs of €0.38m plus minor capital expenditure.

We have updated our financial model to reflect the rights issue outcome with €5.3m gross cash, up from €5.0m. This slightly affects our year-end cash forecast, raised to €5.0m from €4.7m, but the forecast is otherwise unchanged.

These figures relate to the pre-acquisition Sygnis so offer little guide to the development of the new entity.

Rights issue

The rights issue in July 2016 issued 20.5 million shares. Of these, 15.7 million were issued in kind to Expedeon shareholders in payment for their shares. Sygnis then issued 3.0 million shares to existing shareholders and a further 1.8 million shares to new investors. This has increased the number of shares in issue to capital to 37.34m. Costs have not been disclosed, but Edison expects integration and legal costs of about €1.5m. This is offset by approximately €0.5m in cash acquired with Expedeon.

Exhibit 2: Financial summary

€'000s

2014

2015

2016e

2017e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

392

555

3,175

6,900

Cost of Sales

0

0

0

0

Gross Profit

392

555

3,175

6,900

EBITDA

(1,724)

(2,394)

(932)

803

Operating Profit (before GW and except.)

(1,781)

(2,445)

(983)

752

Intangible Amortisation

(524)

(329)

(344)

(344)

Exceptionals

(283)

(828)

0

0

Other

(620)

(260)

(250)

(250)

Operating Profit

(3,208)

(3,862)

(1,577)

158

Net Interest

(137)

(177)

(30)

(26)

Profit Before Tax (norm)

(1,918)

(2,622)

(1,013)

726

Profit Before Tax (FRS 3)

(3,345)

(4,040)

(1,607)

132

Tax

(135)

29

0

0

Profit After Tax (norm)

(2,053)

(2,593)

(1,013)

726

Profit After Tax (FRS 3)

(3,480)

(4,011)

(1,607)

132

Average Number of Shares Outstanding (m)

10.7

13.4

26.8

37.3

EPS - normalised (c)

(19.27)

(19.31)

(3.79)

1.94

EPS - FRS 3 (c)

(32.7)

(29.9)

(6.0)

0.4

Dividend per share (c)

0.0

0.0

0.0

0.0

Gross Margin (%)

N/A

N/A

N/A

N/A

EBITDA Margin (%)

N/A

N/A

N/A

N/A

Operating Margin (before GW and except.) (%)

N/A

N/A

N/A

N/A

BALANCE SHEET

Fixed Assets

8,419

8,594

30,675

30,917

Intangible Assets

1,678

1,826

3,782

4,038

Tangible Assets

169

270

395

381

Other

6,572

6,498

26,498

26,498

Current Assets

4,118

5,440

6,180

6,220

Stocks

19

100

200

322

Debtors

37

206

400

1,150

Cash

3,764

4,557

5,003

4,171

Other

298

577

577

577

Current Liabilities

(1,305)

(1,707)

(1,785)

(1,885)

Creditors

(316)

(322)

(400)

(500)

Current loans

0

0

0

0

Other

(989)

(1,185)

(1,185)

(1,185)

Long Term Liabilities

(2,890)

(1,913)

(1,713)

(1,513)

Shareholder and other loans

(2,890)

(1,913)

(1,713)

(1,513)

Soft loans

0

0

0

0

Other long term liabilities

0

0

0

0

Net Assets

8,342

10,413

33,357

33,739

CASH FLOW

Operating Cash Flow

(3,495)

(3,638)

(1,148)

5

Net Interest

(84)

(177)

(30)

0

Tax

0

0

0

0

Capex

(621)

(582)

(776)

(637)

Acquisitions/disposals

0

0

(1,700)

0

Financing net of costs, inc debt conversion

5,923

6,067

5,300

0

Dividends

0

0

0

0

Other

(155)

(877)

(1,950)

(200)

Net Cash Flow

1,568

793

(304)

(832)

Opening net debt/(cash)

608

(874)

(2,644)

(3,290)

HP finance leases initiated

0

0

0

0

Other

(86)

977

950

200

Closing net debt/(cash)

(874)

(2,644)

(3,290)

(2,658)

Source: Edison Investment Research, Sygnis. Note: We have included €500k in cash from Expedeon.

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Sygnis and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2016. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Sygnis and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2016. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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