Abcam PLC (LON: ABC) – Sustaining long-term growth and value creation

Founded in 1998 and headquartered in Cambridge, UK, Abcam PLC (LON: ABC) is a FTSE AIM 100 Index listed multinational Life Sciences Company, which produces and markets protein research agents and tools to assist life science researchers and clinical communities. The Group is based out at Cambridge, United Kingdom. It helps in the understanding of biology and causes of disease by offering highly validated antibodies and other binders, assays to its customers to support research, diagnostic and therapeutic applications. The operations of the Group are reported in six geographical segments, namely the US, China, Japan, UK, Germany, and Other Countries. The Group employs over 1,100 people (including over 212 PhDs) across all its locations. The Company claims that nearly two-thirds of the world's 750,000 life science researchers leverages Abcam's antibodies, reagents, biomarkers, and assays.

On 14 September 2020, the Company is expected to announce the preliminary results for the year ending 30-Jun-20.

 

(Source: Presentation, Company Website)

Key Fundamental Statistics



Industry Outlook Dynamics

As per the report (April edition) from DataM Intelligence, the Global Monoclonal Antibody Therapeutics Market is projected to reach a market value of USD 165.2 billion by 2026, representing a compounded annual growth rate (CAGR) of 7.40% between 2020 and 2026. The key market driver includes rising incidence of cancer and other chronic diseases, rise in R&D activities in genomics, and the advent of mammalian cell culture. The global market for Monoclonal Antibody Therapeutics is differentiated (based on application) into Autoimmune Diseases, Cancer, Haematological Diseases, Infectious Diseases, and others.  In terms of geography, North America has the dominant share in the global Monoclonal Antibody Therapeutics market. However, the strict regulatory measures and higher costs can result in lengthy approval procedures, which may restrict market growth.

Growth Prospects and Risk Assessment

Abcam has a global team of over 200 PhD scientists, more than 300 associates, across 7 locations. It is assisting advance scientific discovery by providing reagents, life scientists with critical biological tools needed for research, drug discovery and diagnostics. The acquisition of Calico Biolabs is expanding expertise in recombinant rabbit monoclonal antibody development. The Group has implemented the financial and non-stock procurement modules of the Oracle Cloud ERP IT system. Moreover, it is extending the capability of its commercial application in antibody engineering into therapeutic and diagnostic markets in alliance with diagnostic and biopharmaceutical companies, by leveraging the strength of Custom Products and Licensing Activities. Further, Abcam has the potential to grow in the cell editing market, which valued at nearly US$210 million in 2018 and expected to reach US$540 million by 2024.


(Source: Presentation, Company Website)

The Company focuses on bringing innovation capabilities to market through a wider range of distinctive products for the clients to become one of the market leaders in the healthcare market. The Group has a broad geographic reach to 130 countries and has more than 300 products sourcing partners. Abcam is focused on business expansion through digital collaboration (between digital and supply chain teams), ERP, training and development programmes.The Group conducts research in multiple areas such as Cancer, Cardiovascular, Cell Biology, Metabolism and Immunology etc. and has a wide array of products to make life better and are used by 64% of global researchers. It has a broad range of tools and applications to support research and to combat Coronavirus pandemic. The Company, through its wide-ranging scope, had accelerated growth organically and through acquisitions.

However, there are certain principal risk and uncertainties, which can affect business performance. Due to ongoing Covid-19 pandemic, there has been a reduction in demand since research laboratories were temporarily shut during the second half of FY20. Moreover, there are operational risks arising from cyberattacks for loss of data and website inaccessibility, and constrained business growth with lack of resources. The significant exchange rate movements amid recessionary economic conditions can also pose a financial risk. Also, there are strategic risks to growth with increased competition and unavailability of research funding.

The introduction of new technologies, workarounds, channels, strengthening route to market and product offerings by competitors could have a negative impact on the market share of the Company. If the Company fails to acquire businesses or divisions that could bring added value or synergies or fails to identify risks related to the acquisition, it could hamper the financial performance and also affect the valuation of the Company. The Group may face the loss of output due to disaster or disruptive event at logistics facility or manufacturing facility. Being a healthcare Company, Abcam needs to maintain high-quality standards with ethical business practices, failure to do so could impact the business scalability.
 
 
A Glimpse of Operating Segments

The Company has only one core business activity, which is attributed to countries based on customers’ locations.


(Source: Annual Report, Company Website)

Recent Updates

23 July 2020: The Group announced the appointment of Morgan Stanley as Joint Broker, and Numis Securities Limited as Nominated Adviser, with immediate effect.

9 April 2020: ABC raised £110.0 million by issuing equity shares. The newly issued shares represented 4.85% of the existing issued share capital of the Company. The proceeds of the share issuance would be used to fund the Company’s growth strategy, repayment of drawings under RCF (Revolving Credit Facility) and undertaking acquisitions of Innova Biosciences Ltd and TGR BioSciences.

4 March 2020: The Group announced the acquisition of Marker Gene Technologies (entire issued share capital). The acquisition shall bring labelling capabilities and further proprietary assay development technologies to the Company.
 
Progress of Non-Financial KPIs in FY19

In FY19, all product categories grew above underlying market rates and all strategic performance targets were achieved.


(Source: Annual Report, Company Website)
 
Key Shareholders

Full Year Trading Update for the Period Ended 30 June 2020

On 23 July 2020, the Company provided an unaudited trading update for the year ended 30 June 2020. The Company has seen a reduction in demand, due to ongoing Covid-19 mayhem. The Group’s revenue reduced by approximately 10% on both a reported and constant currency basis in the second half of 2020. For the full year 2020, the Group expects to report revenues of £260 million (FY2019: £259.9m), a marginal decline of approximately 1% year-on-year on a constant currency basis. The Company witnessed a steady increase in activity across all regions, with re-opening of laboratories in some European countries and conditions in China were gradually recovering. However, the monthly revenue dipped (compared with prior year) by 40% in April 2020, 28% in May 2020 and 1% in June on a constant currency basis.

The revenue growth profile correlated strongly, with easing of lockdown restriction, improvement in demand, and the partial or full reopening of academic and biopharmaceutical research laboratories. The Company sets out plans in September 2019 to increase the rate of investment in areas (like digital marketing and e-commerce, research and development, technology and global operations), which gives steady growth over the medium and long term.

Despite the impact of Covid-19 pandemic, the Group has made good progress in 2020, with the completion of several acquisitions. Meanwhile, the Company expects that gross margin and adjusted operating margin for the financial year 2020 will be around 69% and in the range of 16%-17%, respectively. According to a long-term growth strategy, Abcam has also begun exploring a potential secondary listing in the US on NASDAQ; however, there is no certainty that the listing NASDAQ will take place or not.
 
Financial Highlights (H1 FY2020)


(Source: Company Website)

On 9 March 2020, the Company provided an interim result for the six months ended 31 December 2019, with a significant period of organic and inorganic investment activities across the Group. In H1 FY2020, driven by growth in catalogue revenue and In-house catalogue revenue for the period, the Group’s revenue increased by 10.8% year-on-year to £138.2 million (H1 FY19: £124.7 million). Due to an increase in the operating expenses for the period, the reported operating profit declined to £26.6 million in H1 FY2020 from £33.4 million in H1 FY2019. The reported PBT (profit before tax) declined by 22.8% year-on-year to GBP 26 million in H1 FY2020. Cash generated from operating activities increased to £39.6 million in H1 FY20 (H1 FY19: £36.4 million). For H1 FY20, the capital expenditure decreased by £2.5 million year-on-year to £17.1 million (H1 FY19: £19.6 million). Interim dividend per share of 3.55 pence was paid on 17 April 2020.
 
Financial Ratios – Higher Profitability Margins versus Industry Median

Reported profitability metrics for the first half of the financial year 2020 stood higher than the Industry Median, reflecting higher revenue generated and better control over expenses. Abcam Plc has delivered a decent return for the shareholders’ as return on equity of 6.7% was higher as compared to the industry median of negative 5.7%. On the liquidity front, Abcam Plc’s current ratio was lower than the industry median, but the Group has sufficient current assets to pay short-term obligations. On leverage front, the debt-equity ratio was 0.45x, which was higher as compared to the industry median of 0.14x, reflecting that the company is more leveraged as compared to the industry.

Share Price Performance Analysis
 

Daily Chart as on 13 August 2020, before the market close (Source: Refinitiv, Thomson Reuters)
 

On 13 August 2020, at the time of writing (before the market close, at 8:55 AM GMT+1), Abcam Plc shares were trading at GBX 1,363, down by 0.58% against the previous day closing price. Stock 52 week High and Low were GBX 1,584.00 and GBX 943.00, respectively.

Bullish Technical Indicator

From the technical standpoint, the shares were trading well above the short-term support level of 20, 50 and 100-day simple moving average prices, which reflects an upward trend in the stock. The Company’s stock has delivered a positive return of around 12.92% in the last year.
 
Abcam Plc Vs FTSE AIM UK 50 Index (1 Year)

 

(Source: Refinitiv, Thomson Reuters)

In the last one year, Abcam Plc share price has delivered 12.93% return as compared to the 9.60% return of FTSE AIM UK 50 index, which shows that the stock has outperformed the index during the last on year.

Valuation Methodology

EV/Sales Approach (NTM)



To compare Abcam Plc with peers, EV/Sales multiple has been used. The peers are Oxford BioMedica Plc (EV/NTM Sales was 7.27x), Dechra Pharmaceuticals Plc (EV/NTM Sales was 6.4x), Syncona Ltd (EV/NTM Sales was 47.66x), Vifor Pharma AG (EV/NTM Sales was 4.27x), AstraZeneca Plc (EV/NTM Sales was 5.73x)  and Vectura Group Plc (EV/NTM Sales was 5x). The Average of EV/NTM Sales of the Company’s peers was 12.72x (approx.).

 
Business Outlook Scenario

With lockdown easing, there has been a steady increase in activity across all regions. If we compare the monthly revenue with the prior year, it was merely 1% down in June while it was 40% down in April. The strong revenue growth profile is supported by the reopening of academic and biopharmaceutical research laboratories. Going forward, the Group is expecting an improvement in demand; albeit significant macro uncertainties will remain. Moreover, the Group is exploring potential secondary listing in the United States on NASDAQ, with the attractive potential from the Group's long-term growth strategy. Overall, the Group appears confident in long-term prospects with their distinctive customer-focused culture and durable financial health.

 
(Source: Presentation, Company Website)

The total revenue is expected to be £260.0 million in FY2020 (FY2019: £259.9 million).  In April 2020, the Group witnessed improvement in trading conditions in China and laboratories started to reopen in some countries in Europe with a steady increase in activity. The revenue was significantly impacted in the month of April and May, while in June with the easing in lockdown restrictions, the revenue improved.

Despite the regional differences and macro uncertainties, Abcam continues to see demand improvement. The Group made an increased investment in global operations, technology, e-commerce, digital marketing and research and development to achieve faster growth in the medium to long term. The Group is focused on making progress in completing several acquisitions despite the impact of covid-19. The Group expects gross margin to be around 69% and adjusted operating margin to be in between 16% to 17% for the financial year 2020.

Over the course of 3 years (FY16 - FY19), the company’s revenue surged from GBP 171.7 million in FY16 to GBP 259.9 million in FY19. Compounded annual growth rate (CAGR) stood at 14.82 per cent.

Based on the decent growth prospects and support from the valuation as done using the above method, we have given a “BUY” recommendation on Abcam at the current market price of GBX 1,358 (as on 13 August 2020, before the market close at 9:57 AM GMT+1) with lower double-digit upside potential based on 12.72x EV/NTM Sales (approx.) on FY20E Sales (approx.).
 
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.
*Dividend Yield may vary as per the stock price movement.

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