Manolete Partners Plc

Manolete Partners Plc (LON: MANO) is an FTSE AIM All-Share index listed insolvency litigation financing Company founded in 2009 and headquartered in London, the United Kingdom. The Company works with insolvency practitioners and their lawyers to maximize returns to creditors.

Investment Rationale for Valuation – Speculative Buy at GBX 240.00

• The Company completed 43 insolvency litigation claims during Q3 FY2021, taking the total to 95 cases for 9M FY2021. MANO had completed 54 cases in FY2020. This significant rise in cases indicates the Company’s increasing operational excellence.
• The 95 completed cases in 9M FY2021 produced a gross total settlement value of £23.9 million, which exceeded expectations.
• Gross cash collected from completed cases rose dramatically by ~60% YoY during 9M FY2021 to ~£9.3 million. It resulted in substantial cash inflow, significantly improving the Company’s liquidity.
• On the profitability front, since FY2018, the net margin of MANO consistently remained higher than the industry median of 23.3%, illustrating the consistent good top-line generation and better management of expenses as compared to the industry.
• Also, MANO consistently generated an ROE of above 11% since FY2018 which is also higher than the industry median of 8.5%. It indicates the efficiency of the management in utilizing resources to generate a return.
• In the last three months, the Company delivered a return that is higher than its benchmark FTSE AIM All-Share index return, i.e. the stock outperformed the index. It could be a positive signal to the shareholders that this trend would continue in future.

Key Risks

• The ongoing UK government economic measures have substantially affected the new cases and may continue to impact in the near future.
• The performance could be affected by a delay in judgement and a delay in average case durations due to the closure of courts amid the Covid-19 crisis.
• In the longer term, the impact of Covid-19 and its impact on the economy poses uncertainty to MANO’s growth prospects. 

Q3 FY2021 Trading Update (released on 26 January 2021)

• MANO delivered a strong operational performance in Q3 FY2021 and 9M FY2021. It completed a record 43 insolvency litigation claims in Q3 FY2021 and 95 cases in total during 9M FY2021. This resulted in a ~60% rise in gross cash collection YoY during 9M FY2021.
• This significant rise in gross cash collection led to a cash inflow after paying operational overheads in 9M FY2021. It was an excellent improvement over the cash outflow in 9M FY2020.
• The cash generated covers the cost of completed as well as 250 ongoing live cases. Hence, there would be substantial profit and cash generation from these 250 cases.
• However, due to the extraordinary UK Government economic support measures in response to the Covid-19 pandemic, there was a decrease in UK insolvencies. This trend is continuing in Q4 FY2021.

One Year Share Price Chart

(Source: Refinitiv, Thomson Reuters)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

The Company expects that the UK government economic support measures will be phased out shortly. After that, the longer-term impact of Covid-19 on the economy would result in a higher rate of corporate insolvencies. Unless there is further support to distressed companies from the government, the sector would see substantial cash generation and growth from the increased number of insolvencies. This will also be helped by normal court operations after a large share of the population gets vaccinated. Hence, MANO has strong growth prospects for the foreseeable future and could generate substantial profit and cash. The stock made a 52-week low and high of GBX 174.77 and GBX 617.60, respectively.

We have valued the stock using the P/E based relative valuation methodology and arrived at a target price of GBX 281.20. On the technical chart, the next important support level is at GBX 209.00.

Based on the significant future growth opportunities, the strong prospect of record cash generation, operational excellence of the Company, excellent track record of the management in generating ROE and support from valuation as done using the above method, we have given a “Speculative Buy” recommendation on Manolete Partners Plc at the current market price of GBX 240.00 (as on 7 May 2021 at 11.40 AM GMT), with a lower double-digit upside potential based on 23.63x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

Yourgene Health Plc

Yourgene Health Plc (LON: YGEN) is an FTSE AIM All-Share index listed molecular diagnostic Company founded in 2000 and headquartered in Manchester, the United Kingdom. With operations spanning across the United Kingdom, Europe, and internationally, the Company researches, develops and commercializes gene analysis techniques for prenatal screening and other applications.

Investment Rationale for Valuation – Speculative Buy at GBX 13.10

• The Company showed strong operational excellence during FY2021. The Company's DPYD chemotoxicity PCR test represented over 14,000 chemotherapy interventions in the reporting period. 
• The Company has been successful in acquiring tenders for the UK's National Microbiology Framework. It demonstrates the high quality and credibility of Yourgene's COVID testing services.
• YGEN’s strong performances in European core business and demand for COVID-related testing products and services more than offset the Covid headwinds.
• Acquisition of Coastal Genomics enabled YGEN to extend its offering and penetrate the US and Canada.
• On the leverage front, YGEN consistently had less than a 0.15x Debt/Equity ratio since FY2019. This ratio is below the industry median of 0.31x. It indicates the significant financial flexibility of the Company.
• In the last three months, the Company delivered a higher return than its benchmark FTSE AIM All-Share index return, i.e. the stock outperformed the index. Potential investors could perceive this as a positive signal for the future.

Key Risks

• The Company has formed partnerships to supply COVID-19 PCR testing services. Failure to provide these services could impact its reputation and subsequently operational performance.
• The demand-supply gap of skilled professionals could impact the financials as salary could substantially go up.
• Foreign exchange rate fluctuations could affect the financials as the Company has international operations. 

Recent News

National Microbiology Framework contract: On 26 April 2021, the Company announced that its tenders for becoming a supplier for National Microbiology Framework had been successful.

FY2021 Trading Update (released on 29 April 2021)

• The Company had an excellent performance in its Covid-19 testing business in the UK and molecular genetics products in Europe. It led to a ~10% rise in revenues YoY for FY2021.
• Due to pandemic-related travel and supply restrictions, NIPT revenue was down YoY by ~22%. However, it was more than offset by the performance of molecular genetics, which generated substantial revenues from the DPYD chemotoxicity PCR test.
• Though there was a pandemic impact on the Company’s performance, Covid-19 testing revenues of £3.2 million significantly contributed to the Company’s top line.
• The acquisitions made by the Company integrated well and met their revenue targets. It makes the Company more diversified and resilient in performance.

One Year Share Price Chart

(Source: Refinitiv, Thomson Reuters)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative) 

Conclusion

The diagnostics sector received a headwind from the Covid-19 testing services. This sector plays a major role in countries with poor access to healthcare as it enhances the chances of preventive care. The Company is well-positioned to utilize these opportunities. It is well set up to drive further growth in the core business. Yourgene's Clarigene® SARS-CoV-2 test continues to meet stringent PHE quality criteria, and the Company will slowly roll out its services outside the UK market. The management expects to achieve a top line in excess of £25 million in FY2022. The stock made a 52-week low and high of GBX 11.50 and GBX 22.19, respectively.

We have valued the stock using the P/E based relative valuation methodology and arrived at a target price of GBX 16.65. On the technical chart, the next important support level is at GBX 10.64.

Based on the strong prospect of the Molecular Genetics business and further revenues from Covid-19 testing amid continued disruptions from the pandemic, expected synergies from the acquisitions, successful tenders, financial flexibility arising from low debt/equity ratio and support from valuation as done using the above method, we have given a “Speculative Buy” recommendation on Yourgene Health Plc at the current market price of GBX 13.10 (as on 7 May 2021 at 8.40 AM GMT), with a lower double-digit upside potential based on 75.67x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).

*Dividend Yield may vary as per the stock price movement.

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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