Here are the main points from ABG’s latest report. Target price reduced to SEK 35 (210) and recommendation reduced to HOLD (BUY).
Preliminary Q2 figures and credit provision
Preliminary Q2 sales were SEK 543m (-9% vs ABGSCe 594m) and EBITDA was SEK -20m (-165% vs ABGSCe SEK 31m). Organic growth was 9% (ABGSCe 31%), driven by a slowdown in emerging biopharma and biotech related to recent macroeconomic challenges. Management has also reviewed historical accounts receivables, which has led to a more conservative sales process and a credit provision of SEK -59m (SEK -43m net of COGS), meaning reported EBITDA in Q2 will be SEK -63m. The provision relates to sales in 2021 for which customers have not been able to pay due to the changing market environment. The products have been returned and will be sellable to other customers. Furthermore, management will implement a cost reduction program to reduce expenses by SEK 100m on an annual basis, with full effect from Q1’23.
Uncertainty on historical and future financials
To us, this announcement is a major concern, which is exacerbated by the abrupt departure of the CFO three months ago. With historical financial performance now in question, we are uncertain what the true level of demand is from customers that can make payments. Furthermore, we believe that further credit provisions cannot be ruled out, such as from sales recorded over the last 6m that have not yet become overdue. The Q2 figures are another concern, with the market slowing down while BICO’s costs continue to increase rapidly.
Down to HOLD on uncertainty and balance sheet concerns
We revise our estimates and turn more cautious, assuming 15% organic growth for ’23e-’24e. Despite us assuming only modest opex growth (~8%/y) and a large reduction in capex (SEK 500m to SEK 200m), we do not expect BICO to generate a positive FCF until ’25e. With current cash of SEK 1.2bn and SEK 1.5bn in convertible debt maturing ’26e, and SEK 470m in earn-outs to be settled in ’22-’24e, we believe there is a risk of an equity issue. Considering the material uncertainty to operations and financials, we downgrade to HOLD (BUY) with a new TP of SEK 35 (210).
Financial concerns, down to HOLD
We believe that Friday’s announcement raises several questions:
- If BICO’s financial results for 2021 were based on sales to customers not able to pay for its products, what is the true financial performance of the company?
- Has management taken any precautionary measures for sales that occurred over the past six months, but where products are not yet overdue? Will there be further credit provisions?
- Why have customers purchased products they cannot afford, but refrained from using them so that they now (6-18 months later) remain in a re-sellable condition?
- Why has this issue not been identified earlier, such as in February, when management “initiated measures to improve the invoicing process to reduce day until payments”?
- How does this relate to the sudden departure of the CFO in April?
- To what company (or companies) do these issues relate? Was the company recently acquired or was it in the Group when this happened?
Concerning developments in Q2
Beyond the sales to questionable customers, we are concerned about the developments in Q2 where the market seemingly saw a slowdown while BICO’s costs continued to increase. Assuming that the gross margin was 73%, cash opex increased to SEK ~415m in Q2, which corresponds to a 15% q-o-q increase from Q1. It should also be noted that this was during a period when management guided that it would see only modest cost increases during the year. In our view, this development was not addressed in the press release. Assuming that capex is similar to previous periods, we believe the underlying EBITDA indicates a negative FCF in the range of SEK -100m to SEK -150m in the quarter. With this in mind, we believe the annual cost savings of SEK 100m are not enough to turn around the development.