Pinned straw:
From the SM meeting and a brief review of the FY24 financials and ComSec here are my thoughts on the business, which at best constitute a “vibe” rather than analysis. I am sure @Strawman will have more interesting and relevant comments:
· IDT started in 1975 and is a Contract Development and Manufacturing Organization (CDMO) which acts as a third-party provider to R&D and GMP services for drug companies (including medical cannabis)
· Financial history is horrible and even FY24 with sales doubling pretax losses only dropped from -$8.5m to -$5.4m and operating cash flow from -$7.9m to -$9.6m. This is based on $17m in land & building assets and $88m of equipment (per meeting, can’t reconcile this to the financial statements). So, my big question was how the hell is it going to get to operating CF break even and if it does it’s ROA is still going to be woeful so how much will be needed in capex.
· According to Paul (CEO) he thinks around $18m in sales ($13.2 current) is Op CF break even. To support this the Utilities & Maintenance expenses are expected to come down, Raw material and employee expenses will go up, but based on the FY23 to FY24 move where it was up around 20% on 100% sales growth, then it shouldn’t increase much. Also the key thing for me was that he said they are currently at 35-40% capacity and that is Q4 Sales, which if you look at the below from the presentation is running at over $4m for the quarter ($16m pa), so you would think that minimal capex is needed for capacity to increase to double current sales to $32m.
· The current Q4 run rate is expected to be improved upon in in FY25, noting that around 40% of the $25m in opportunities in the pipeline is expected to result in sales and much of the current sales is expected to continue. Sales cycles take 6-12months to move to sales generation – not sure on the churn rate, but expect it would be very lumpy and picking a figure would be hard.
· The business has done a bit of a transformation over the last couple of years, Cannabis has gone from almost all to some of it’s “Specialty Orals” business and the Advanced Therapies (mRNA, ADC’s, etc) has been developed as a new opportunity and is expected to drive much of the future growth.
· The “Friend Shoring” of manufacturing is providing a tail wind as IDT competes directly with much cheaper CDMO’s in China. It is also taken the last couple of years building up the processes and capacity to win the high end business, which if it can be shown to be a reliable provider, will see solid growth.
Interesting and I will keep an eye on it, but an investment thesis needs to see a lot more execution on winning business and then how it manages scaling. It is not a capital light business so ROA is critical and to date it has been horrible.
I suspect that if it continues on it’s current trajectory and in Op CF break even in FY25 there is a solid upside to the price (currently trading on half asset value), but long-term sustainable profit and cash generation at high rates of return are a long way off. Hence it may offer a trade opportunity, particularly if it has dropped in price from hear heading into half year reporting and may show CF break even.
Currently not interested.
Nice summary @Tom73
I don't have a lot to add. This is a story of a cash cow that got blindsided by low-cost Chinese manufacturing and the expiry of drug patents. They have a lot of assets that are being under-utilised and, as you say, would likely show a very poor return to date. That being said, it's a sunk cost and not a consequence of Paul's decisions.
It was interesting to see him downplay the medical cannabis stuff, no doubt a reflection of some of the insanity that went on in that space (huge over-investment, arguably, as a consequence of 'free' money and an over-hyped secular trend). Still, I see it as a legitimate area of medicine and one that is seeing growing acceptance.
The long sales cycles and ramp phases are worth noting. As is the fact that Paul has been very consistent in his messaging -- going back over last year's chat he pretty delivered as expected.
I also thought it noteworthy that he downplayed the takeover interest from Mynd.
I likewise don't hold, and probably wont for the foreseeable future. Just a bit outside my wheelhouse. However if the top line momentum continues and they start becoming self funding i'd probably take a closer look.