Company Profile

Hamilton Thorne Ltd is a United States-based Advanced Medical Equipment & Technology company. The company is publicly traded on the Toronto Venture Exchange (TSXV: HTL). The group is a leading global provider of precision instrument, consumables, software and services to the Assisted Reproductive Technologies (ART) and cell biology markets. The company markets its products under the brands like Hamilton Thorne, Gynemed, Planer, and Embryotech Laboratories, through the company's growing direct sales force and distribution channels worldwide. The company's clientele includes fertility clinics, university research centres, animal breeding facilities, pharmaceutical companies, biotechnology companies, and other commercial and academic research establishments. The company is positioned as a premium supplier to a customer base that is driven by quality, service and technological advancement.

Investment Rationale 

• Rapidly expanding Assisted Reproductive Technology Market: Assisted Reproductive Technology market size surpassed US$ 26 billion in 2019, and it is expected to become a US$ 45 billion by 2025, which implies a compounded average growth rate (CAGR) of 9.5% in between (2019-2025), according to some market research firms. The industry is benefiting from increasing marital age, rising tobacco and alcohol consumption and increasing obesity rate. Also, a surge in poly-cystic ovarian syndrome (PCOS), tubal factors and endometriosis are other catalysts for the industry.

• A consistent performer: Over the past 4-years, Hamilton Thorne Ltd has recorded a revenue CAGR of 40.5%, from a reported revenue of US$ 9.03 million in FY16 to revenue of US$ 35.36 million in FY19. Further, the operating profit has leapt up with a CAGR of 32.5% in the same time. And, in the last 5-years, the share of HTL has delivered an average annual price return of 32.5%.

• Strong Balance Sheet: The company has a strong balance sheet with quite manageable debt proportion in the total capital structure. The Long-term debt to total capital ratio stood at 17.8% at the end of Q1FY20, with an interest coverage ratio of ~ 3.6x; further, the company has consistently deleveraged its balance sheet over the last few years. At the end of FY16, the Long-term debt to Total Capital ratio was 55.6%, which has now brought down to 17.8%, which suggests that a majority of growth is funded by the free cash flow generated and dependence upon debt capital had been reduced gradually. Further, at the end of Q1FY20, the company had decent liquidity of US$ 15.9 million, and free cash flow to the equity stood at US$ 3.13 million, with free cash flow yield of 3.30%.

• Stock trading well-above 200-day SMA support level: Despite a recent free fall in the equity markets, where penny stocks were the hardest hit, HTL shares have shown resilience driven by its strong business model and rapid expansion. The stock has generated return of 12.5% on a YTD basis and 11% on a YoY basis. Further, at the current price, its shares were trading well above the crucial long-term support level of 200-day simple moving average. 

Recent Development

As on June 01, 2020, the company reported that FAX Capital Corp. had acquired an additional 3,182,000 common shares of the group at a price of CAD 1.10 per share for an aggregate value of CAD 3,500,200. Post an additional acquisition of the shares, FAX Capital Corp now holds 11.95% stake in the company.

As on May 29, 2020, HTL announced a private placement financing of CAD 7.0 million through the issuance of an aggregate 6,364,000 shares at a price of CAD 1.10 per share. The net proceeds will be used or future acquisitions and for general corporate purposes.

Financial Highlights: Q1FY20

In the period under review, the company reported a 36% YoY sales growth to US$10.4 million, and in constant currency terms Q1FY20 sales leapt up by 38%. The strong performance of the company was primarily driven by strong sales in the human clinical market, and the contribution from the Planer acquisition, along with a significant increase in consumables sales worldwide, which was slightly offset by a reduction in equipment sales in the US. Sales into the cell biology/research markets also grew substantially, primarily due to the contribution from the Planer acquisition, along with a strong toxicology testing equipment sale, while sales into the animal breeding market were slightly down. Led by the strong topline performance, gross profit during the quarter surged by 31% to US$ 5.2 million; however, gross margin was down slightly (1.9%) to 50.2% on account of change in product mix. Earnings before Interest, Tax, Depreciation and Amortizations (EBITDA) improved 21% to US$ 1.8 million as compared to US$ 1.5 million reported in the same period of the corresponding financial year. The EBITDA margin for the period stood at 17.3%. Cash flow from operations during the period under consideration was stood at US$ 0.7 million, with a Cash position of US$ 15.9 million.

Source: Company filing.

Stock Performance

At the time of writing (as on June 10, 2020, before the market close), shares of HTL traded 0.85% higher at CAD 1.18. In the year-over period, shares of HTL has registered a 52W High of CAD 1.50 as on February 20, 2020, and a 52W Low of CAD 0.86 as on October 16, 2020, and at the current price of CAD 1.18, shares of HTL traded approximately 36% above its 52w low price level and 22% below its year’s peak level. Further, at the current price, HTL shares were trading well above the crucial long-term and short-term support levels of 200-day and 50-day moving averages.

1-year price return (as on June 10, 2020, before the market close), Source: Refinitiv (Thomson Reuters)

On a YoY basis, shares of HTL featuring a price return of 11.3% and on a YTD basis, the stock is up by 12.5%and outperformed the benchmark indices significantly in the same time. 

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 57.06% of the total shareholding. Thorne (Daniel K), and Fax Capital Corp holds the maximum interests in the company at 15.27% and 11.95%, respectively.

Source: Refinitiv, Thomson Reuters

Outlook

HTL started FY20 on a very strong note, however, post the outbreak of COVID-19, the company has experienced relatively lower demand for some of their products and services, as IVF clinics have reduced their activities amid coronavirus pandemic. In April, Europe and the US have encouraged IVF clinics to resume operations with enhanced safety measures. Also, demand for the group’s products has recovered decently in China, which was severely impacted in the Q1FY20. The recovery in demand from China is likely to provide a boost to the group’s topline in the near term. Further, flattering coronavirus cases across the world is likely to drive the demand for the company’s offerings in the near to medium term.

Key Risks

• COVID-19 related uncertainties: The next wave of COVID-19 outbreak could create difficulties for the group in the short-term to mid-term period.
• Forex: The company is exposed to foreign exchange risks, a dip in US Dollar values against the basket of majors could weigh on the group’s topline and profitability. 

Valuation Methodology (Illustrative): Price to Book Value based Relative Valuation

Note: All figures have been taken from Refinitiv (Thomson Reuters).

Stock Recommendation

The group's performance in the Q1FY20 was robust, supported by strong sales in the human clinical market, and the contribution from the Planer acquisition. The planner acquisition is likely to boost the company's performance going forward. Further, the company has a solid balance sheet with manageable debt obligations and a strong liquidity position. Also, the net proceeds realized from the recent share's placement has bolstered the group's liquidity further, and the group is well-positioned to comfortably navigate the challenging time. Moreover, the group's China business started showing the sign of recovery, which was significantly impacted in Q1FY20 and flattering COVID-19 cases across the world is expected to bring demand for the group's offerings back to the normal by the end of the third quarter of FY20. Further, the company has a proven track record of strong financial performance, with 4-year revenue CAGR of 40.5%, and consistently maintained EBITDA margin above 15% over the last five years. Also, the company has consistently deleveraged its balance sheet over the past few years, which reduces the balance sheet risk of the company and shows that the business is generating sufficient cash flow to manage its operation with a very small contribution of debt capital.

Therefore, based on the above rationale, considering the risk-return trade-off and valuation done using the above methodology, we have given a “Speculative Buy” recommendation at the closing price CAD 1.18 (as on June 10, 2020), based on the NTM Peer’s Average Price-to-Book Value multiple of 3.15x on the FY20E Book value per share of HTL. We have considered Knight Therapeutics Inc (TSX: GUD), HLS Therapeutics Inc (TSX: HLS) and CRH Medical Corp (TSX: CRH), etc., as a peer group.

Disclaimer

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