Profit from medtech growth with this undervalued stock

Belluscura (BELL:48p), a leading medical device developer focused on lightweight and portable oxygen enrichment technology, has entered a significant exclusive licence, marketing and distribution agreement with its global manufacturing partner, InnoMax Medical Technology.

Headquartered in Shenzhen, China, InnoMax has acquired the exclusive rights to manufacture and distribute Belluscura’s award-winning X-PLOR portable oxygen concentrator (POC) in China, Hong Kong, Macau and Singapore. In addition to the X-PLOR, the agreement will include the DISCOV-R, the company’s next-generation dual-flow POC.

Weighing less than 1.5kg, the X-PLOR is the world’s first modular POC and generates more oxygen by weight than any other FDA-cleared POC in its class. It can deliver up to 95 per cent pure oxygen to patients 24 hours a day, improving the quality of life for millions worldwide who suffer from chronic lung diseases, such as chronic obstructive pulmonary disease (COPD) and respiratory distress caused by Covid-19. An estimated 100mn people suffer from COPD in China alone, approximately six times the number of patients in the US, demonstrating the need for oxygen therapy in China and associated territories.

It’s cost-effective, too. Users can swap out the filter cartridges to enable higher-capacity oxygen flow without having to buy a new device. The result is significantly more affordable oxygen therapy for the life of the patient.

 

A valuable royalty

Under the terms of the 10-year agreement, Belluscura will receive increasing minimum cumulative royalties on licensed products and a share of the net profits on sales of accessories. The agreement will be exclusive for a minimum of five years, although if minimum sales quantities are not achieved, Belluscura and InnoMax can mutually agree to grant InnoMax a non-exclusive licence for the remainder of the term.

Minimum cumulative royalties over the term of the agreement range from $27.5mn (£21.7mn) if the licence is converted to being non-exclusive from year six, and up to $55mn (£43.4mn) if the licence remains exclusive for the entire term. Initial sales are expected to commence in the fourth quarter. It’s a highly valuable agreement that could be worth two-thirds of Belluscura’s market capitalisation of £65.3mn. Moreover, the group will continue to sell and distribute its products outside these Asian territories.

 

Sales ramping up

It’s not the only good news for Belluscura’s shareholders; earlier this month the group announced a $15mn purchase order for 6,500 of its DISCOV-R portable devices for the US market. It highlights the demand for the device amid growing interest from medical device distributors, retailers, patients and durable medical equipment providers. The price of $2,300 per unit is well above the $1,256 average unit price Bellascura achieved on the 1,226 unit sales in 2022, reflecting the sale of high-margin additional batteries, warranties and carts. Production will start at the end of next month and shipments will continue into 2024.

Of course, the ramp-up in production requires additional working capital. At the start of 2023, Belluscura had net cash of $1.8mn and held $10.8mn in inventory and inventory deposits. The directors have since raised £4.3mn net proceeds through the issue of convertible unsecured loan notes (10 per cent coupon, conversion price of 50p and expiry in 2026), and £2.9mn through an equity issue, at 25p, to bolster its working capital position. House broker Dowgate Capital is pencilling in closing net cash of $2.3mn at the 2023 financial year-end and notes that the group is exploring inventory and sales financing. The brokerage plans to update its forecasts to incorporate both the InnoMax royalty agreement and the bumper US order after Belluscura releases interim results next month.

However, what is clear is that the group is at an inflexion point whereby the operational leverage of the business can really kick in. Indeed, the raft of orders and increasing earnings from the InnoMax royalty agreement should drive a sustainable move into cash profitability. To put this into perspective, based on 20,000 unit sales per year, forecast annual revenue of $28.8mn should generate cash profit of $1.5mn. However, double unit sales to 40,000 per year and cash profit soars ninefold to $13.4mn to produce earnings per share (EPS) of around 5p.

 

Tekcapital yet to reflect improving prospects for Belluscura

Belluscura’s investment case is looking increasingly attractive, a point that is not reflected in the current rating of Tekcapital (TEK:9.75p), an investment company that holds 15.14mn shares in the group as well as valuable interests in food technology, autonomous vehicles and smart eyewear companies. The stake in Belluscura is worth £7.2mn, or 41 per cent of Tekcapital’s own market capitalisation of £17.4mn.

Moreover, having raised £2.25mn, at 16p, in a placing in February 2023 and a further £2mn, at 15p, in April 2023, Tekcapital bolstered its cash and net receivables to around £4.5mn, a sum equating to 25 per cent of its market capitalisation. True, £1.6mn of the cash is being used to fund commercial inventory of investee company MicroSalt, a business that has developed and manufactures a proprietary low-sodium salt. The holding in MicroSalt was valued at $16.5mn (£13mn, or 7.3p) in Tekcapital’s 2022 accounts, a sum worth more than 70 per cent of its current market capitalisation. It should be worth significantly more in the event of a spin-out of MicroSalt on London’s junior market, hence why Tekcapital has appointed broking house Zeus Capital to lead the IPO.

A further £1.5mn of Tekcapital’s cash is being invested in Guident, a developer of remote monitoring and control software (RMCS) that improves the safety of autonomous vehicles and delivery robots, to build out an RMCS facility and fund the fabrication and testing of regenerative shock absorbers for prospective clients in the automotive industry. Bearing this in mind, Guident has secured a paid proof of concept agreement with a tier-1 tyre manufacturer for its regenerative shock absorbers.

I can also reveal ahead of Tekcapital’s interim results next month that Guident’s sales pipeline has “experienced remarkable growth over the past year”, a point well worth noting given that the value of its holding is in the books for $18.1mn (8p). Valued on a discount cash flow basis, a 50 per cent increase in the compound annual growth rate of sales projections would increase the Guident valuation by $34.5mn.

 

Tekcapital’s portfolio fair value estimate at 31 August 2023
Portfolio company	Carrying value 31 December 2022	Estimated carrying value 31 August 2023	Value per share
Guident	$18.1m	$18.1m	8.0p
Innovative Eyewear	$8.1m	$3.1m	1.4p
Microsalt	$16.5m	$16.5m	7.3p
Belluscura	$12.1m	$9.2m	4.1p
Smart Food Tek	$0.04m	$0.04m	0.0p
Convertible loan notes	$1.3m	$1.3m	0.6p

		Estimated carrying value 31 August 2023	Value per share
Portfolio fair value		$48.3m	21.5p
Cash and net receivables (post first half operating costs but before investments in Guident and MicroSalt)		$5.7m	2.5p
Intangible assets		$0.3m	0.1p
Total NAV		$54.27m	24.0p
Source: Tekcapital’s 2022 annual accounts and London Stock Exchange RNS. The company reports in US dollars. Belluscura valuation based on share price of 48p a share and holding of 15.138mn shares. Innovative Eyewear valuation based on stock price of $0.60 and holding of 5.19mn shares. Guident and Microsalt holdings stated at 31 December 2022 valuation. Cash balance includes £2.25mn raised in February 2023 and £2mn in April 2023. Exchange rate used £1:$1.268.

 

NAV more than double current market capitalisation

The point is that Tekcapital’s spot net asset value (NAV) is at least $54.5mn, or £43mn (24p) at current exchange rates. That’s 146 per cent more than its current market capitalisation of £17.4mn (9.75p). Furthermore, the hefty share price discount to NAV completely ignores the re-rating potential for Belluscura, value accretion from a planned IPO of MicroSalt and the strong progress being made by Guident.

So, although the shares are the laggard in my 2022 Bargain Shares Portfolio, a re-rating is more than warranted. Buy.

 

■ Simon Thompson’s latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com at £16.95 each plus P&P of £3.75, or £25 plus P&P of £5.75 for both books.