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HTL.V: Record Revenue for 2016, Accretive Strategic Acquisition of Gynemed; Expect Revenue Boost in 2017.

05/12/2017
By Anita Dushyanth, PhD

TSX:HTL.V

Financial Update

On April 28, 2017 Hamilton Thorne (TSX:HTL.V) reported financial results for Q4 2016 and annual 2016.

Revenue for Q4 2017 was $3.6 million and for fiscal 2016 amounted to $10.5 million.  U.S. sales accounted for 34% of the quarter’s revenue.  The growth was fueled by sales of LYKOS® clinical laser systems, the addition of three and one-half months of sales from Embryotech Laboratories Inc., and after sales services.  Gross margin improved by 150 basis points to 65.3% in 2016 as compared to the prior year – much of which is attributable to the recent Embryotech acquisition.  As a reminder HTL acquired Embryotech, a provider of quality control products and services, in September – the acquisition not only expanded and diversified the company’s product line, it also brought a recurring revenue stream and incremental gross margins – both of which showed up in the Q4 results.  The continued success of growth is due to the diversity of product mix, the impact of higher Embryotech margins as well as tremendous execution by Hamilton Thorne’s team. 

Significant expenses amounting close to $6 million were incurred in 2016, of which approximately $270,000 of expenses was associated with the completion of Embryotech acquisition.  In addition, there was an increase in interest expense due to increased borrowing to complete the Embryotech acquisition as well as added expenses associated with the extension of letters of credit to support the firm’s previous bank line of credit.  Q4 net income was $0.5 million and EBITDA was $0.8 million, improved from $0.4 million and $0.5 million – which, again, reflects positive contribution from Embryotech.  For the year, the firm reported a net income of close to $0.7 million, EBITDA of over $1 million and an EPS of $0.01 per share.  All numbers came very close to our estimates. 

Cash flow from operations was close to $1 million, and the cash balance as of December 31, 2016 amounted close to $2 million.  Assuming revenue growth continues and financial resources grow as per plan, we believe that the current cash position should be sufficient to support operations for the coming year.  

Since our initiation (April 2016) and until May 3, 2017’s close, the company’s shares have risen 274% following two acquisitions. 

Business Update

Hamilton Thorne, looking to follow-up with the success of their Embryotech acquisition, announced the acquisition of Gynemed GmbH & Co. KG in late April for approximately $15 million using cash, stock and seller debt.  Gynemed is a Lensahn, Germany based leading manufacturer and distributor of premium equipment and consumables for the IVF clinic and laboratory markets in Germany, Austria and Switzerland.  The acquisition was completed using $9.3 million cash, $2.3 million of stock as well as $3.5 million of unsecured convertible notes.  The cash portion was funded by cash on hand, plus $4 million of new debt facility and $9.2 million private placement.
The firm had a $5.5 million five-year term loan at 4.25% maturing in September 2021 and a $2.5 million secured line of credit with a US bank which is scheduled to mature in September 2018 and is subject to renewal.  The amended credit agreement will add to its existing credit facility, with two term loans of $4  million at 4.49% and $5.5 million at 4.25% and a $2.5 million line of credit at prime rate (currently 3.75%) which matures two years from the closing date and is renewable annually upon bank approval.  Hamilton Thorne will use the facility to strengthen its working capital position following the acquisition of Gynemed and to position the firm for future growth opportunities.

Service revenue had grown significantly in 2016 and since the strategic focus for their business going forward will be to grow consumable sales, thereby driving recurring revenue, the firm intends to focus their sales efforts on accessories, consumables, software and services.  Hamilton Thorne’s strategic acquisition of Gynemed, whose consumables segment is roughly 80% of their business, speeds along the company’s strategy of diversifying via acquisitions.  

Hamilton Thorne’s acquisition is a specific, well-articulated value creation strategy that pursues international scale while filling portfolio gaps.  Gynemed is a profitable and growing business that offers premium branded/OEM IVF cell culture media, consumables and devices, has an excellent reputation and proven sales channel in the well-established European ART market.  Secondly, there is significant expansion in product offering with a highly complementary product portfolio. We think that the combined company can benefit from Hamilton Thorne’s strong partnerships in global markets and Gynemed’s strong presence in Europe.  Working together, they can introduce their products into new territories much more rapidly.  The expanded product portfolio allows the company to leverage the existing global distribution infrastructure in key markets not currently served by Gynemed, including the U.S.  It positions Hamilton Thorne to better capture higher future growth in key global markets. 

Management intends to focus on expanding primarily in territories that accept the CE Mark.  The U.S. and Canada business will be the next focus going forward.  The company had sales to three major distributors, which exceeded 10% of revenues in 2016.  Hamilton Thorne has the second largest trading partnerships with China but Gynemed has not yet penetrated this large market which holds substantial upside potential.

Valuation

The past two years have been incredible in terms of growth and transformation as the company continues its rapid expansion through acquisitions.  The acquisition of ELI and Gynemed will increase Hamilton Thorne’s revenue base.  For the year ended December 31, 2016, Gynemed had annual revenues of over $9 million, EBITDA of approximately $2.8 million (approximately $2.3 million after normalization adjustments) and net income of close to $2.5 million (approximately $2 million after normalization adjustments).  This acquisition is expected to be immediately accretive to revenue and EBITDA.  

We have updated our financial model following 2016 earnings and the recent acquisition.  We expect modest increase in net income from Gynemed’s product sales during Q2 2017.  This is because the acquisition was completed during Q2 2017 (early May 2017) and therefore the net income recognized during this quarter (2 months) will be offset by the acquisition expenses.  We expect operational expenses to increase with increased staffing compensation, increased trade show presence and business development expenses.  The firm continues to face foreign exchange headwinds as much of its costs are in U.S. dollars and more than 60% of its instrument sales are outside the U.S.  We think the effect of FX can be offset as Embryotech’s services and consumables will be sold in the U.S.  and Gynemed operates largely in Europe.  The updated financial model suggests a price target of $1.10/share, over 33% above the current trading level.
 
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