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Having exceeded 9p in July and been comfortably above 6p ahead of 19th December-announced results (for the six months ended 30th September 2016), shares in medical collagen-focused Collagen Solutions (COS) fell to recently sub 5p (a sub £9 million market cap). However, behind the numbers, new leadership look to have an exciting growth strategy - something we expect to become clearer in 2017. The shares are a buy at a 6.25p offer.
The half-year results showed a loss up from £0.45 million for the corresponding six months in 2015 - and £0.98 million for the whole year to 31st March 2016 – to more than £1 million. However, this particularly included unrealised translation losses on deferred contingent consideration, with the reduction in cash £0.84 million to £1.66 million and in net current assets £0.85 million to £1.66 million.
This was on the back of total income 30% higher, to £1.89 million, with the company noting “recent investment in sales and marketing, and in particular talent, systems and processes”.
The core business is currently the development, supply and manufacture of biomaterials on contract, but “a significant value-creating opportunity” is seen in the establishment of a pipeline of proprietary finished devices. An integration of R&D efforts is noted to have “resulted in a more focused pipeline of near-term finished device projects that will address major markets in orthopaedics and wound care”.
The flagship in the device respect is ‘ChondroMimetic’ – with the company “on track to initiate a six-year retrospective study for ChondroMimetic with new data to demonstrate long-term tissue regeneration with 3D MRI analysis as well as sustainability of the early positive functional results, and in parallel obtain the CE mark in 2017”.
Overall, researcher Hardman & Co considers there “numerous new opportunities”, though that the current stage sees timing complex and that its forecasts are conservative. However, these still see sales rising to more than £4 million for the current full-year (prior year: £3.2 million) and more than £5 million next year.
The increased deferred consideration though saw non-current liabilities slightly higher to £2.83 million. The company is understood to be investigating the possible use of debt financing, though this is a risk here.
However, there looks to be significant growth opportunity in the combination of the current core business with higher margin contribution from the emerging proprietary devices. On sales momentum continuing and proprietary device progress being shown in 2017 – the company expected to launch its ‘ChondroMimetic’ study within the next three months, and aiming for CE marking by the middle of the year – we’d expect the shares to recover smartly from here.
The fundamentals look solid, the new management team is impressive and we have an exciting Q1 and Q2 newslow to drive the rerating. Buy at 6.25p and below (they were at 5.75p offer when we foirst tipped these shares circa ten days ago) targetting a recovery to 8p+ to sell by Easter.
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