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Hard to see value in InnovaDerma at the current share price

By Gary Newman | Thursday 3 May 2018


Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.


Whenever a company doubles in share price in a short space of time it tends to get my attention, and I look for reasons that justify such a sudden increase.

That has definitely been the case with InnovaDerma (IDP), which has seen its share price go from around 100p to the current level of 167p, and it spiked as high as 216p on Wednesday. That 60% rise represents an increase in market cap of nearly £9 million, so it must have had some major news to have caused that, right?

The RNSs show that it has just launched its trade marked Prolong device for premature ejaculation in the US and Australia – I’ll avoid any obvious puns about rises and the like, but it does seem surprising that it caused such a steep increase in share price, given that this launch was announced in the interim results back in March. I can see why investors would take it as positive news that it happened on schedule, but not to the tune of £9 million when it is unclear what sort of revenue and profit it will generate.

Especially when that comes within a couple of months of a trading update stating that revenue growth for the year will be less than forecast due to its main customer in the UK, Superdrug, ordering less of its Skinny Tan product than it had been expecting.

It is true that the latest rise only takes its share price back to where it was prior to this profit warning, but I don’t see the two balancing each other out, given the amount of revenue that Skinny Tan contributes

The exact impact on revenue is unclear, but the company stated that up until the end of February, Skinny Tan revenue had grown by 210% year-on-year, yet for the last 12 weeks of that period it was up just 60% compared to the same period in 2016/17. That is of course still a significant amount of growth, but for such an early stage company as this, any slowdown in growth could be a cause for concern, especially when it is as a result of its largest customer.

The company also mentioned in its trading update that although it expects revenue for the full year to be substantially higher, profit for the year is likely to be at a similar level to FY2017, at circa £700,000 after tax. That would also reflect the costs associated with the product development and launches being realised in the second half of the current financial year for the company.

Aside from this, it does seem to be making an impact on the market with the launch of its new products and further promotion of its existing products, with revenue from its Roots haircare range being up over 250% on the previous quarter. It also has several other products that are already being sold, and it is expanding into new markets.

Now before people start getting upset, I’m certainly not suggesting that there isn’t some value here, as at least the company is actually making a profit and even after the recent rise the PE ratio isn’t too crazy at around 34 times, especially for such an early stage company. But the stall in profit growth, even if just temporary, does make that PE ratio look a bit more racy than many would like to see – if profit was continuing to grow rapidly year-on-year it would be less problematic.

It would certainly look more attractive back down around the 100p range where it was before, and barring any unexpected good news I suspect that level may well be seen again soon.

Coming back to the costs of product development and launches in H2, which the company mentions, I will be interested to see if it now has enough cash, in light of profits being lower than expected. At the end of 2017 it had just over £2 million in the bank, and although that is enough to cover its running costs – although not with huge amounts to spare given that wages and admin costs were over £1.5 million for the six months up until the end of 2017 - it remains to be seen whether it will be sufficient to fund its growth plans, given the amounts it is spending on marketing, plus it tends to hold quite a bit of inventory to meet demand.

I definitely wouldn’t be rushing to buy into this current spike as it feels a bit artificial – I wouldn’t bet on the company not raising further funds that is for sure – but can see potential back around the 100p level if it is able to prove that it can maintain growth, and the recent downgrade in profit expectations is just a one-off blip.

       

 


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