Good morning,
Welcome to today’s edition of The Armchair Analyst, a 5-minute daily update on the ASX life-sciences sector.
Marginally profitable, cash-generating businesses are largely ignored by retail investors.
Too small for institutional investors and too boring for retail is the ‘no man’s land’ for some ASX-listed healthcare companies.
It won’t go bankrupt any time soon… but how do I make money on my investment?
That’s the question I asked myself when I sat down to listen to Trajan Group Holdings (ASX: TRJ)...
… and I think I might have found an answer.
But first…
The Pulse Check
Immutep (ASX: IMM) is 50% enrolled in its global Phase III trial for non-small cell lung cancer. Futility analysts Q1 this year. (IMM)
🪑 I still hold all of my IMM shares from that trade when the company signed the licensing deal with Dr Reddy late last year. I plan to hold them through the outcome of the futility analysis (which I hope will be a catalyst for further deals for the company).
Atomo Diagnostics (ASX: AT1) secures a $630,000 order for its HIV Self-Tests under a government-funded program. (AT1)
Neuren Pharmaceuticals (ASX: NEU) doses its first patient in the Koala Phase 3 trial of NNZ-2591 for Phelan-McDermid syndrome. (NEU)
Careteq (ASX: CTQ) divests its subsidiary, Embedded Health Solutions, for $5 million. (CTQ)
Imricor Medical Systems (ASX: IMR) has submitted another part of its MRI-based heart surgery system for FDA 510(k) clearance. Several parts have already received FDA clearance; this specific part is designed to digitise and display electrical signals from the body. (IMR)
Epsilon Healthcare (ASX: EPN) signed a 3-year manufacturing agreement with Puro New Zealand yesterday, forecasting $6 million in revenue over the contract term.
Healthscope’s lenders are poised to back a proposal to turn the country’s second-biggest private operator into a not-for-profit company with a network of 32 hospitals. (AFR)
Cash Injection
Memphasys (ASX: MEM) secures $800,000 through a share placement at $0.005 per share.
🪑 I participated in this raise.
Eikon Therapeutics prices upsized initial public offering at US$381 million. (PR Newswire)
M&A, Big Pharma Wants a Wife
Medtronic to acquire Israeli devicemaker CathWorks for up to US$585 million for coronary artery disease technology. (Fierce Pharma)
Eisai signs US$388 million deal for Japan-only rights to Henlius’ anti-PD1 monoclonal antibody for cancer. (Pharmaceutical Technology)
PrimeGen US and DT Cloud Star sign a US$1.5 billion merger agreement, effectively backdoor-listing the stem cell company on the NASDAQ. (Pharmaceutical Technology)
Under the Microscope
Whenever I listen to a company presentation, I take out my little green notebook (it has to be green because, you know… markets), open a fresh page, and write down one thing.
“What is the bet…
For the rest of lunch, I try to answer that question.
Being “undervalued” is not enough for me.
I want to know: if I buy shares today, how will I make money by selling them at a higher price in the future?
What are the value inflections, and what are the risks for these not to materialise?
This is why I tend to prefer pre-revenue drug development companies with defined catalysts and inflection points.
While these stocks will inevitably need to raise capital, there is a pattern to how these stocks move, and if I recognise those patterns correctly, happy days!
But what about a company that doesn’t need to raise cash?
Moving with less predictable patterns at a slower pace.
Mature, revenue-generating stocks that are far from “going bankrupt” but also are a long slog to grow…
As a retail investor, how do I make money?
“What is the bet…
As I looked at the blank page, with those words staring back at me, I realised what this bet could be.
This is the story of Trajan Group Holdings (ASX: TRJ).
Trajan manufactures and sells precision tools and components for accurately measuring and assaying ‘things’.
What things?
If it can be sampled, it can be measured.
Blood, water, food, rocks, carbon, tissue. TRJ has thousands of products and SKUs across multiple verticals.
The company went public in 2021 and reached a peak share price of $4.60 before moving on a strong downward trajectory to its current price of $0.67.
Last year, the company faced significant headwinds due to the Trump tariffs.
It made a bet on “globalisation” and lost.
Growth wasn’t as strong as the market would have liked, and over the last few months, it has traded on very, very thin volumes.
The largest buyer at the time was actually the CEO, who owned more than 50% of the company… either a genius move to pick up stock cheap, or a supportive shareholder doubling down when the market disappears.
So what are the numbers?
Last financial year, the company generated $166 million in revenue, with guidance of $170-$180 million for the next financial year.
The normalised EBITDA last year was $15.5 million, with guidance of $16-$19 million for the next financial year.
This guidance was reaffirmed yesterday:
(Source)
Side note, what I’m learning with these guidance prints is that wording matters.
Compare this guidance to the previous one, which included the upper-bound numbers of $180 million for revenue and $19 million for nEBITDA in the wording.
By dropping the upper bounds of the previous guidance in the latest print, the company may just eek into the lower bounds.
The stock traded flat on ~$50,000 of volume, with the market being relatively uninspired by the news.
Okay… back to the story.
For novice investors, there are some important concepts to understand.
You may look at Trajan with a $120 million Enterprise Value and $170 million in forecast revenue and think:
“Wow, the company is making $170 million but is valued at $120 million, how is that even possible?”
Well, it all comes down to profit.
How much does Trajan make after adjusting for all of the costs in the business?
This number is printed as the nEBITDA (or normalised earnings).
For Trajan, that number was $15.5 million in the last financial year, rising to $16 million next year.
This is a much better way to value the business using the Enterprise Value to Earnings ratio, and then compare it to peers.
Trajan is valued at an ~8.5x EV/EBITDA ratio.
This is well below the larger players in the space, which trade at around 20x EV/EBITDA, such as Thermo Fisher and Agilent.
It may be fair to say that Trajan is undervalued relative to its peers.
The trouble with using this valuation is that it only tells part of the story.
It doesn’t answer the most important question: If I buy shares today, how will I make money in the future?
“What is the bet…
The lunch was scheduled on the exact same day that some news emerged of a takeover offer by a Private Equity firm for MonashIVF:
The stock jumped massively on the day, and shareholders who bought just before were treated to a 40% + rise.
(It was the talk of the table)
This is just me speculating, but I see this type of takeover offer somewhere in Trajan’s future.
A private equity company that evaluates the business's valuation and sees greater value in it as a private asset rather than a public vehicle.
Any takeover of Trajan should be a significant re-rating event for the stock, but the timing is the problem.
Invest just before hand… amazing.
But sit in the stock for years, and the opportunity cost to make more active investments may pass by.
Betting on a takeover as an exit is an extremely risky strategy - because it all plays out in the shadows.
There is no way to know if a deal is close, far, if one just fell through, or if there is even one at all…
It's not my style of investing, chasing value and waiting for the market to “wake up”.
But for those of you out there that are the true “value hunter” it might be worth a look.
So who are the takeover targets?
First, Thermo Fisher is a US$220 billion behemoth in the science services industry.
If Thermo Fisher wants to own the entire “sample to result” supply chain for assay measuring tools, then Trajan would be a perfect acquisition.
Second, Agilent is a US$39 billion company that provides analytical equipment.
As a major customer of Trajan, Agilent is the natural owner, particularly if it wants to secure critical components for its own supply chain.
The final player that I want to highlight is a private equity company.
Just like the Monash IVF trade…
If Trajan reaches a point at which the public market significantly undervalues it, private equity may make a takeout bid.
So, “What is the bet…
In my view, it is all about timing the takeover and being patient enough to wait for the market to realise the company's value.
A big thank you to Steven Tomsic for sharing the Trajan story with me.
See you all next week,
The Armchair Analyst
