The Cellmid business currently is at an inflection point, with a major structural change relating to its foundation midkine assets and an approaching major boost in OTC revenue opportunities due to newly established supply contracts. This seems like an appropriate time to attempt a financial analysis.
A number of posters have indicated they are undertaking an analysis of the information recently made available to inform decisions on their CDY holdings. I include below the results of my own fairly exhaustive analysis of both the company’s financial position and market position at this point, which I hope those genuinely interested in their investment will find of value.
Financial Analysis It is claimed that the recent sale of the Lyramid subsidiary will lead to savings in both staff and IP maintenance costs. The first diagram below shows ongoing quarterly cash expenses to end of March as a chart updated from those posted previously.
Immediately noticeable is that outflows overall have shown significant decline over the last 18 months. Staff costs have become constant and currently are at the same level as three years ago. These should reduce further with Lyramid staff now transferring to its new owner. Savings should include payments previously made to Direct Capital to administer the subsidiary. Reductions in administration costs will include those that were required to maintain the MK patent portfolio.
With midkine activity stagnant to minimise expenditure reported R&D allocations have become insignificant. Whilst this will reduce the base for future tax grant support there are other assessable costs relating to OTC research activities, apparently hidden within staff and administration outlays.
Of course profitability is only achieved when outflows are less than inflows, and in the end the viability of a business is dependent upon when that milestone can be achieved. The following charts and analysis address that likelihood.
The figure below shows annualised revenue achieved together with a comparison of the level of reported quarterly cash burn. Sales revenue is seen to have flattened recently, supposedly due to COVID-19, but it still displays growth compounding at an average rate of +37% pa since FY14. Relative cash-burn has been consistently decreasing, but not at a rate that would suggest immediate profitability. The expected expense reductions and revenue boost referred to earlier would be required to achieve this.
Sufficient information is available to allow a reasonable estimate of the company’s near-term financial future. I have attempted a detailed breakdown of this below through standard analytical methods. Data to current were taken from financial statements in annual and half-yearly reports. Future projections are based on sales agreements currently in place.
Apart from the removal of midkine costs the major contributor to the analysis shown is the introduction of new OTC revenue sources derived from entry into the China market. The 10-year agreement with Ourui Health Management (OHM) specifies purchase orders of 500K units in CY2021, a minimum one million units in CY2022, and double-digit annual growth thereafter. This agreement alone, described as a ‘game-changer’, will obviously have a major effect on income going forward.
A January OHM $530K initial order for 84,672 bottles showed an average revenue return to Cellmid of $6.26 per unit as supplied. However, most of this supply was in bulk form that required packaging in China at OHM’s expense. These likely were supplied at around half normal price. If so, a more realistic estimate of return with the required import permit now in place would be a minimum of $10 per unit. In the analysis above a conservative figure of $8 per unit has been used.
There is a real possibility of substantial income deriving from licensed development of the midkine patent portfolio in the years ahead, but this should not be material to the time period used in the analysis.
In the absence of an extensive DCF analysis standard practice is to base a current valuation using expected net earnings (NPAT) two years forward as a guide. Using a P/E ratio of 25 (80% pharmaceutical and 20% biotechnology) the analysis above indicates an expected FY2023 market cap of $179.1M.
With $8.8M cash in the bank and significant income expected the current issuance of 180.92M shares is unlikely to need increasing for some time. This then equates to a current price of $0.99 per share increasing to $1.59 a year later derived from FY2024 estimates.
Market Analysis It is hardly necessary to point out that over the six reported years analysed above the CDY share price has done little other than continually decline. The point has been made incessantly on HC. This clearly contradicts with a recorded compounding revenue growth of 37% pa over that period. Such a situation is certainly not confined to CDY, but I believe it worthwhile to attempt an analysis of why these disparities exist.
A high market cap listed company has a shareholder register dominated by financial institutions and professional investors. Under these circumstances a revenue growth rate of 37% pa would see corresponding share price growth of a similar degree. A valuation derived from a professional equities analysis generally will be reflected closely in market price.
This form of market cap determination has little relevance to small- and micro-cap companies, particularly in speculative technology areas. Here share prices are determined by retail investors who, to be blunt, are amateurs involved in a major professional game. As a result price movements are determined not by fundamental value but by prevailing sentiment.
This situation has been described within the field of Behavioural Finance by theories developed through the Nobel Prize winning works of Tversky, Kahneman and Thaler. It identifies distinct cognitive and emotional biases evident in markets dominated by retail investors, and that lead to share price distortions.
Anyone interested in researching this area could search on the several irrational behavioural characteristics that have been identified. Those listed below are easily recognisable throughout the HC forum, and CDY participants have made a special effort. For example, they provide an explanation for an apparently contradictory ‘Sell; Held’ disclosure.
Cognitive Biases Mental Accounting
Anchoring Herding Behaviour Dunning-Kruger Effect Emotional Biases Self-Attribution Bias
Sunk Cost Fallacy
Regret Aversion
Regret Avoidance
There is a classic cartoon that appeared in the New Yorker a few years ago that I always find amusing. It is intended to demonstrate the Dunning-Kruger Effect and is relevant to retail shareholder activism in micro-caps. Share prices usually follow a related flight path.
Summary A relatively simple fundamental analysis of Cellmid’s financials demonstrates what I think just about everyone agrees on – its share price is substantially undervalued.
With the likelihood of the company becoming profitable next financial year and continuing its high income growth a gradual change in the share register profile can be expected going forward. This should lead to an increased recognition of the company’s fundamental value in its share price.
Cheers
T7
The above analysis is all IMO. It is not intended as advice and no responsibility is taken for numeric accuracy. DYOR.
CDY Price at posting:
6.8¢ Sentiment: Buy Disclosure: Held
