Abcam Plc (LON: ABC) – Sustainable Business Model with Robust Balance Sheet Position

Abcam PLC (LON: ABC) is an FTSE AIM 50 Index listed multinational Life Sciences Company, founded in the year 1998 and headquartered in Cambridge, UK. The Company produces and markets protein research agents and tools to assist life science researchers and clinical communities. The operations of the Company are reported in six geographical segments, namely the US, China, Japan, UK, Germany, and Other Countries. ABC employs over 1,100 people (including over 140 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. The Company is classified as a global leader in the supply of life science research tools and 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.

(Source: Company Presentation, Company website)

Growth Prospects and Risk Assessment

The Company focus 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. 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.

Abcam 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. The Company has a broad geographic reach to 130 countries and has more than 300 products, sourcing partners. ABC is focused on business expansion through digital collaboration (between digital and supply chain teams), ERP, training and development programmes.

Abcam Plc witnessed a compounded annual growth rate of ~11.03% in revenue over the period FY16 to FY20, while cash and short-term investments recorded a CAGR of ~28.4% during the same period.

(Source: Kalkine Research, Refinitiv)

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. Being a healthcare Company, Abcam needs to maintain high-quality standards with ethical business practices, failure to do so could lead to contact losses. 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 Company operates in multiple geographies, and its profits can be impacted negatively due to the foreign exchange rate fluctuations. The unavailability of research funding could impact the operational performance of the Company. If Abcam fails to develop an IT infrastructure, it could lead to cyber-attacks or frauds and could hamper the reputation. The Company may face the loss of output due to disaster or disruptive event at logistics facility or manufacturing facility. ABC is also exposed to the effects of political and economic risks.  

Industry Outlook Dynamics

The UK healthcare sector is focused on life-changing treatment and prevention of diseases. The public healthcare system runs under the National Health Service (NHS) that is responsible for patient care and general well-being in the UK. The Healthcare sector includes hospitals, pharmaceuticals, medical device manufactures and many other components of the healthcare system.

Given the increasing waiting list at the National Health Service, the UK private healthcare sector is expected to grow at a CAGR of 2.6 percent between 2017 and 2023 to USD 13.8 billion as per Pharmiweb.com report. As per the Central Bureau of Statistics report (2019), around 19.4 percent of the UK’s total population was aged 65 years or above, and it is believed that the market for Home Health Care is increasing.

As per Fortune Business Insights report, the UK HealthCare market is expected to grow at CAGR of around 6.35 percent between 2018 and 2026. The market size of Home HealthCare was USD 1,192.6 million in 2018, which is expected to grow to USD 1,951.7 million by 2026.

As per IBIS world report, the market size of the UK hospitals grew at around 0.4 percent between 2015 and 2020. The ongoing Covid-19 health crisis has shifted the focus of every individual towards finding the vaccine and saving lives. The UK government set out initial funding of £5 billion in March 2020 to treat the coronavirus patients and maintain the staffing level. Since then, it has announced various schemes to support the Healthcare sector.

Some of the industry growth drivers - increasing investment in the health systems with a target to provide access to healthcare for everyone; Demographics of the UK as the ageing population needs more care and healthcare infrastructure; Cutting-edge development in healthcare technology that is helping in early diagnosis of the disease and also helps in the predictive analysis of the future disease pattern. Also, the sector is currently facing some risks - Insufficient budget to meet the service requirement, Outdated technologies and tools for the treatment of medical conditions. 

Recent Developments

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

On 16 June 2020, Abcam announced that its Deputy Chairman Non-Executive and co-founder, Jonathan Milner, will be stepping down from his position at AGM in November 2020.

Key Shareholders Statistics

A Glimpse of Business Segments

The Company’s revenue from external customers and information about its non-current segment assets (excluding deferred tax) are as follows:

(Source: Company Website)

Financial Highlights (for the 12 months ended 30 June 2020 (FY20), as on 14 September 2020)

(Source: Company Website)

• The Company witnessed a strong net cash position of £80.9 million, with a net cash inflow from operating activities of £63 million and proceeds of £110 million equity placing in April 2020.
• In FY20, Abcam’s total reported revenue remained broadly flat year on year at £260.0 million (FY19: £259.9 million).
• Overall, the results were impacted by the Covid-19 pandemic in the second half of the year. The Company saw a reduction in demand as research laboratories shut down temporarily or with reduced activity.
• ABC has shown a steady increase in activity across all regions, with re-opening of laboratories in some European countries and conditions in China improving gradually.
• During the year, the Company has distributed £25 million of dividend to shareholders. Capital allocation reviewed by the Board in H2 FY20, with the intention to prioritise growth investment to maximise long-term value creation.

Operational Highlights (FY20)

• Despite the impact of Covid-19 pandemic, the Group has made a good progress in 2020, with the completion of several acquisitions.
• 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.
• It has invested across all areas of the five-year growth plan. The Company will also 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.
• Abcam also grew the specialty antibody portfolio, with signing more than 50 new agreements.
• 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 Ratios – Strong Profitability Margins versus the Industry Median

Reported profitability metrics for the financial year 2020 were higher against the industry median, reflecting higher revenue generated and better control over expenses as compared to the industry. On the liquidity front, Abcam Plc’s current ratio was lower than the industry median, but the Group has sufficient current assets to pay the short-term obligations. On leverage front, the debt-equity ratio was 0.47x, which was higher as compared to the industry median of 0.05x, reflecting that the company is more leveraged as compared to the industry.

Share Price Performance Analysis

Daily Chart as on 17 September 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On 17 September 2020 (before the market close, at 8:48 AM GMT+1), Abcam Plc shares were trading at GBX 1,210, down by 1.14% against the previous day closing price. Stock 52-week High was GBX 1,584.00 and Low of GBX 943.00, respectively.

14-day RSI is currently supporting the upward movement (33.24 level), which means there is a good potential for a short term rebound in the stock price.

Abcam Plc Vs FTSE AIM UK 50 Index (5 Years)

 (Source: Refinitiv, Thomson Reuters)

In the last five years, Abcam Plc share price has delivered ~96.43% return as compared to ~36.94% return of FTSE AIM UK 50 index, which shows that the stock has outperformed the index during the last five years.

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

Business Outlook Scenario

The Company has shown a decline in financial performance in the financial year 2020, due to Covid-19 crisis. In April 2020, the Group witnessed improvement in trading conditions in China and laboratories started to reopen in some countries in Europe with 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.

Abcam saw a revenue growth of 7.5% from In-house catalogue segment on a reported basis. The Company has a strong net cash for the period after equity placing of £110 million in April 2020. The Company distributed £25 million as dividend and reviewed capital allocation to prioritise growth investment to maximise value creation for long-term.

Despite the regional differences and macro uncertainties, Abcam continues to see demand improvement. The Company made an increased investment in global operations, technology, e-commerce, digital marketing and research and development to achieve faster growth in the medium term and long term. The Company is focused on making progress in completing several acquisitions despite the impact of Covid-19 pandemic. Abcam has started exploring secondary listing on NASDAQ in the US, based on the attractive potential of its long-term growth strategy and is expected to occur in Q4 of the calendar year 2020.

ABC has a strong fundamental growth story with attractive prospects for a medium-term and long-term period. The Company did not change its investment plans and is focused on achieving financial goals for 2023/24, with revenue targeted to be in-between £450 million to £500 Million, above 30% of adjusted operating margin and over 18% of ROCE (Return on Capital Employed).

Considering the signs of recovery, decent operating & financial performance, high level of cash generation capabilities, and support from the valuation as done using the above method, we have given a “Buy” recommendation on Abcam at the current price of GBX 1,210 (as on 17 September 2020, before the market close at 8:48 AM GMT+1), with lower-double digit upside potential based on 9.56x EV/NTM Sales (approx.) on FY21E 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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