Abacus reported revenue of US$4.1m in Q319, up 97.4% year-on-year. Through the first nine months sales are up 99.3%. For the quarter, CBD CLINIC sales were US$2.9m, up 42.7% compared to Q318, and CBDMEDIC sales were US$1.2m, up 71.9% compared to Q219. We expect this high rate of growth for CBDMEDIC to continue as the brand can now be found in 4,600 retail locations (up from 3,000 last quarter) and will be in 7,000 as of January of 2020 thanks to the upcoming deployment in an additional major national retail pharmacy chain.
Written by
Abacus Health Products |
Strong Q3 sales |
Financial update |
Pharma & biotech |
26 November 2019 |
Share price performance
Business description
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Abacus Health Products is a research client of Edison Investment Research Limited |
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Abacus reported revenue of US$4.1m in Q319, up 97.4% year-on-year. Through the first nine months sales are up 99.3%. For the quarter, CBD CLINIC sales were US$2.9m, up 42.7% compared to Q318, and CBDMEDIC sales were US$1.2m, up 71.9% compared to Q219. We expect this high rate of growth for CBDMEDIC to continue as the brand can now be found in 4,600 retail locations (up from 3,000 last quarter) and will be in 7,000 as of January of 2020 thanks to the upcoming deployment in an additional major national retail pharmacy chain.
Year end |
Revenue (US$m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/17 |
2.6 |
0.5 |
N/A |
N/A |
N/A |
N/A |
12/18 |
8.5 |
0.6 |
0.04 |
0.0 |
N/A |
N/A |
12/19e |
16.1 |
(17.1) |
(0.87) |
0.0 |
N/A |
N/A |
12/20e |
39.7 |
(6.8) |
(0.30) |
0.0 |
N/A |
N/A |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
CBDMEDIC reach continues to grow
With the signing of another national retail chain with around 10,000 locations, CBDMEDIC’s retail presence is set to grow further. In January 2020, CBDMEDIC will be in around 7,000 retail locations in 31 states. The nationwide footprint of these retail pharmacy chains totals 34,500 stores, so the number of locations that offer CBDMEDIC should continue to climb as it is more fully deployed.
CBD CLINIC provides a strong foundation
CBD CLINIC, which is marketed to healthcare practitioners, continues to grow strongly, up 42.7% for the quarter and 60.9% through the first nine months of the year. As with CBDMEDIC, CBD CLINIC is increasing its penetration and is now sold in over 14,500 health-related practitioner offices, up from 12,000 the previous quarter. Also, the recent distribution agreement with WBC Group should help penetration within the chiropractic community.
Ingestible CBD line launch set for Q220
Abacus plans to launch its ingestible CBD health and wellness line in Q220, which will help the company expand into the larger non-topical market. The company will initially launch online and in limited retail locations with a full launch to come after the FDA clarifies its view of CBD in food and supplements in the coming months, though exact timing of the FDA guidance is unknown.
Valuation: C$325m or C$15.07 per basic share
We are increasing our valuation of Abacus to C$325m or C$15.07 per basic share (C$12.73 per diluted share), from C$308m or C$14.26 per basic share (C$12.52 per diluted share), as we have increased our sales estimates for CBD CLINIC, which continues to grow very strongly, and also rolled forward our DCF by a quarter. This increase was partially offset by lower net cash and lower ingestible CBD line estimates for 2020 due to the limited initial launch.
Product sales continue to grow
Abacus reported a very strong third quarter as sales increased by 97.4% compared to Q318 to US$4.1m thanks to expanding footprints for both CBD CLINIC and CBDMEDIC. CBD CLINIC is increasing its penetration and is now sold in over 14,500 health-related practitioner offices, up from 12,000 the previous quarter. Also, the recent distribution agreement with WBC Group should help penetration within the chiropractic community as its wholly owned subsidiary, MeyerDC, is the official distributor of the American Chiropractic Association. According to the Bureau of Labor Statistics, there are over 50,000 chiropractors in the United States. In total, we calculate over 500,000 licensed chiropractors, acupuncturists, massage therapists and physical therapists practising in the United States so there is plenty of room for the brand to grow in these target markets past the current 14,500. Additionally, the newly designed product design (set to launch in 2020) may help increase the attractiveness of the product to customers.
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Exhibit 1: New CBD CLINIC product design |
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Source: Abacus Health Products |
With the signing of another national retail chain with around 10,000 locations, CBDMEDIC can now be found in the top three pharmacy chains (which based on store counts are CVS, Walgreen’s and Rite-Aid according to IQVIA). In January 2020, CBDMEDIC will be in around 7,000 retail locations in 31 states up from 3,000 locations in 24 states at the end of Q219. The nationwide footprint of these chains totals 34,500 stores, so the number of locations that offer CBDMEDIC should continue to climb as it is more fully deployed, though the pace of this deployment will vary by chain and state.
With regards to the ingestible line, the company plans a limited launch in Q220 with an initial focus of online sales with limited retail location penetration. A full launch will depend upon FDA clarification on its view of CBD in food and supplements, which may include dose limitations as many retailers will likely want to wait until the guidance is released prior to putting CBD containing supplements on shelves. Guidance is expected in the coming months though the exact timing is unknown.
Valuation
We are increasing our valuation of Abacus to C$325m or C$15.07 per basic share (C$12.73 per diluted share) from C$308m or C$14.26 per basic share (C$12.52 per diluted share) as we have increased our estimates for CBD CLINIC, which continues to grow very strongly, and also rolled forward our DCF by a quarter. This increase was partially offset by lower net cash and lower ingestible CBD line estimates for 2020 due to the limited initial launch.
Exhibit 2: Valuation based on DCF
Discounted cash flow (US$000) |
539,006 |
Probability of commercial success |
40% |
Risk-adjusted discounted cash flow (US$000) |
215,602 |
Net cash (US$000) at 30 September 2019 |
28,240 |
Valuation (US$000) |
243,842 |
C$/US$ exchange rate |
0.75 |
Valuation (C$000) |
325,123 |
Basic shares (m) |
21.6 |
Value per basic share (C$) |
15.07 |
Options (m) |
4.0 |
Fully diluted shares (m) |
25.6 |
Value per diluted share (C$) |
12.73 |
Source: Edison Investment Research
Financials
We have increased our sales estimates for 2019 to US$16.1m from US$15.9m and for 2020 to US$39.7m from US$39.3m. Our 2019 forecast was increased due to a higher than expected sales run rate in the quarter. In the longer term we have increased our expectations for CBD CLINIC sales. For 2020, we have lowered our estimates for the ingestible CBD line as it appears the initial launch will be more limited than we had expected; however, we have left longer-term forecasts the same as we have not changed our view on the market potential.
We have also increased our SG&A estimates for 2019 to US$25.5m from US$21.3m due to higher than expected marketing and advertising spending. This higher spending is due to targeted television and radio advertising to promote CBDMEDIC as well as expenses associated with the partnership with Rob Gronkowski and expenses related to the new agreements with Gillette Stadium and Patriot Place. For 2020, we are increasing forecast SG&A spending to US$30.6m from US$30.2m. Our operating loss estimate is now US$16.6m for 2019, up from US$12.6m previously while our 2020 estimate has changed slightly from an operating loss of US$6.4m to US$6.3m.
Exhibit 3: Summary of estimate changes
US$m |
2019e |
2020e |
||
Old |
New |
Old |
New |
|
Revenue |
15.9 |
16.1 |
39.3 |
39.7 |
SG&A |
21.3 |
25.5 |
30.2 |
30.6 |
Operating profit/(loss) |
(12.6) |
(16.6) |
(6.4) |
(6.3) |
Source: Edison Investment Research
The company reported US$28.2m in net cash on its balance sheet at the end of Q319 and has guided towards EBITDA profitability by the end of 2020. We believe the current cash level will be enough to fund operations through sustainable profitability.
Exhibit 4: Financial summary
US$'000s |
2017 |
2018 |
2019e |
2020e |
||
Year end 31 December |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
||||||
Revenue |
|
|
2,575 |
8,537 |
16,109 |
39,669 |
Cost of Sales |
(1,249) |
(3,484) |
(6,067) |
(13,884) |
||
Gross Profit |
1,327 |
5,053 |
10,042 |
25,785 |
||
Research and development |
(1) |
(119) |
(881) |
(1,233) |
||
Selling, general & administrative |
(759) |
(3,958) |
(25,522) |
(30,627) |
||
EBITDA |
|
|
567 |
965 |
(16,817) |
(6,531) |
Operating Profit (before amort. and except.) |
|
|
567 |
970 |
(16,589) |
(6,303) |
Intangible Amortisation |
0 |
0 |
0 |
0 |
||
Exceptionals/Other |
0 |
0 |
0 |
0 |
||
Operating Profit |
567 |
970 |
(16,589) |
(6,303) |
||
Net Interest |
(42) |
(410) |
(473) |
(478) |
||
Other (change in fair value of warrants) |
0 |
(1,020) |
(4,255) |
0 |
||
Profit Before Tax (norm) |
|
|
525 |
561 |
(17,062) |
(6,782) |
Profit Before Tax (IFRS) |
|
|
525 |
(459) |
(21,318) |
(6,782) |
Tax |
0 |
0 |
0 |
0 |
||
Deferred tax |
0 |
81 |
3,952 |
0 |
||
Profit After Tax (norm) |
525 |
561 |
(17,062) |
(6,782) |
||
Profit After Tax (IFRS) |
525 |
(378) |
(17,365) |
(6,782) |
||
Average Number of Shares Outstanding (m) |
N/A |
13.0 |
19.7 |
22.7 |
||
EPS - normalised ($) |
|
|
N/A |
0.04 |
(0.87) |
(0.30) |
EPS - IFRS ($) |
|
|
N/A |
(0.03) |
(0.88) |
(0.30) |
Dividend per share (c) |
N/A |
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 |
|
|
0 |
158 |
7,057 |
7,731 |
Intangible Assets |
0 |
0 |
0 |
0 |
||
Tangible Assets |
0 |
57 |
532 |
1,207 |
||
Other |
0 |
102 |
6,525 |
6,525 |
||
Current Assets |
|
|
830 |
6,504 |
31,834 |
25,968 |
Stocks |
46 |
1,004 |
2,163 |
4,940 |
||
Debtors |
404 |
913 |
2,727 |
2,727 |
||
Cash |
345 |
3,814 |
23,420 |
14,777 |
||
Other |
35 |
773 |
3,524 |
3,524 |
||
Current Liabilities |
|
|
(96) |
(4,600) |
(6,997) |
(6,997) |
Creditors |
(96) |
(4,600) |
(6,997) |
(6,997) |
||
Short term borrowings |
0 |
0 |
0 |
0 |
||
Long Term Liabilities |
|
|
0 |
(2,198) |
(289) |
(289) |
Long term borrowings |
0 |
(2,198) |
0 |
0 |
||
Other long term liabilities |
0 |
0 |
(289) |
(289) |
||
Net Assets |
|
|
733 |
(135) |
31,605 |
26,413 |
CASH FLOW |
||||||
Operating Cash Flow |
|
|
(30) |
829 |
(19,416) |
(7,741) |
Net Interest |
0 |
0 |
0 |
0 |
||
Tax |
0 |
0 |
0 |
0 |
||
Capex |
0 |
(63) |
(602) |
(902) |
||
Acquisitions/disposals |
0 |
0 |
0 |
0 |
||
Financing |
0 |
(170) |
39,595 |
0 |
||
Dividends |
0 |
0 |
0 |
0 |
||
Other |
0 |
(22) |
22 |
0 |
||
Net Cash Flow |
(30) |
575 |
19,599 |
(8,643) |
||
Opening net debt/(cash) |
|
|
(375) |
(345) |
(1,367) |
(23,419) |
HP finance leases initiated |
0 |
0 |
0 |
0 |
||
Exchange rate movements |
0 |
0 |
0 |
0 |
||
Other |
(0) |
448 |
2,453 |
0 |
||
Closing net debt/(cash) |
|
|
(345) |
(1,367) |
(23,419) |
(14,776) |
Source: Edison Investment Research, company reports
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