Investing ? Start with your ABC's (ABC)

Abcam ( ABC )


Abcam is a producer and distributor of research-grade antibodies and associated products.

Their vision is to built the largest online catalogue of the best antibodies in the world.

Markets:

Abcam has customers in over 60 countries and operate in 3 main markets:

USA accounted for over 50% of sales in 2007 ( the accounts don’t show a proper breakdown of revenue per region – one of my gripes with the company ).

Europe had a 58.8% yr on yr increase in volume of business in 2007. German and French companies can now contact ABC directly in their own language.

Japan: Office openend in December 2006 and its aim is to increase sales in East Asia ( therefore read China as well ), one of the fastest growing antibody markets in the world.. In the first half this office saw sales of Stg 680K. The Japanese version of the website has recently been enhanced.

Abcam is HQed in Cambridge, UK where they have just built a new High-Throughput Production ( HTP ) facility that will deliver higher margin products ( more on this later ).

Business Model:

ABC produces their own antibodies. The antibodies produces in-house have a substantially higher profit margin than antibodies which have been sourced ( for obvious reasons ) hence the decision to built the HTP laboratory. In 2007 6% of products sold were produced in-house but they accounted for 16% of revenue.

The Aim: ABC expects to produce 50% of Abcam branded products on their sites by 2012. Thereby significantly boosting revenue and margins. The HTP facility is expected to add over 35,000 new quality high margin antibodies to ABC’s catalogue over the next 5 years.

Furthermore ABC sources products from institutes, academic laboratories and primary manufacturers and tries to get exclusive rights to the distribution of those antibodies.

In developing their own antibodies ABC must do R&D and they claim that they are experts at identifying which products have the most promise and then offering products which meet the demands those products will pose. Those products fall within their Core Focus Areas ( CFAs ).

This could be an important competitive advantage as ABC have presented externally around these CFAs and have also run marketing activities around them.

Internally ABC has vertivcally integrated its technical service, marketing, business development and sales departments to take advantage of the CFAs.

ABC has found this to be a highly successful strategy for capturing market share and plans to develop more CFAs in the future.

Sales:

Sales mainly come from the companies website:

http://www.abcam.com/

On which you can get acquainted with Molly. ;o)

However ABC also has third party distribution agreements on going. The following link is a fine example of such an agreement:

http://www.advfn.com/p.php?pid=nmona&cb=1197475262&article=21761489&symbol=L%5EABC

The Group states that margins are lower in the early stages of product distribution deals leading to margins exceeding the rest of the catalogue later on.

ABC’s product range should number just below the 40,000 ( yes that’s right ) mark with the more established products generating larger sales than the new products. This is due to ABC’s product review system called Abreviews. The longer a product has been in the catalogue for the larger the quantity of product information it has.

Abreviews adds value and is backed by the Abpromise as such:

• The customer can leave a detailed description of the product after they have used it. This will enable other customers to find exactly what they are looking for quicker.
• One customer can contact another customer who is using the product.
• If the product does not meet the criteria as listed on Abreviews then the customer can call ABC’s expert team for help and assistance
• Should a product be faulty ABC will replace it or provide a full refund if reported within 120 days.

Abcam operates using a fully automated web-enabled stock management system. They have invested in state-of-the-art storage and handling facilities which have enabled them to speed up shipping times and therefore increase output. ABC is able to operate at high levels of efficiency with lower handling costs.

Customers can directly access the website to find the status of their orders so that they can plan their experiments more effectively

ABC have built a strong reputation for trust and reliability. With their large and growing database of users ABC can now tailor our marketing activities according to customer interest.


The Figures:

Abcam has only been listed for 2 years so yearly averages won’t necessarily show the correct progress that is being made. Anyhow:

Turnover increased by 26.6%

Gross profit margin fell slightly to 59.13% from 61.34%

Gross margins were fell slightly due to the increased allocation of costs to cost of sales and to lower margins in the early stages of the exclusive product distribution deals signed in the year. Later on, as mentioned previously, these margins are expected to exceed all other margins in the catalogue.

Operating margin also fell slightly to 21.23% from 23.32%

PBT was higher in both years than Operating Profit due to interest receivable and similar income. Cash & similar amounted to Stg 11.884m in 2006 & Stg 10.709m in 2007.

PBT margin also fell slightly to 23.25% from 24.94%

PAT margin was 16.91% down from 17.69%

Bear in mind though that a 17% profit margin is a very strong margin to have and shows ( amongst other figures ) that a company has a competitive advantage in its industry.

Basic EPS increased by 11.74% - a low figure due to the extra shares issued upon the companies IPO in November 2005

Return on Equity – the number that Buffett prefers over EPS – was 28.25% down from 29.97%. However any return on equity figure in the high 20% shows that a company has excellent operations especially with low debt. Total debt only runs at 18% of assets and that includes a provision figure as well.

In 2007 ABC increased its cash position by Stg 1,337,000 – don’t forget they had spend Stg 1.8m on acquiring distribution rights and Stg 2.3m on facilities and equipment. So this company is basically a cash cow ( as shown by the high Net Profit Margin anyway ).

R&D – increased to 7% of sales from 6.3% reflecting the growing number of products produced in-house.

Forex – ABC generates a large amount of cash in US$ & Euros and has hedged this exposure with forward contracts.

Dividend – ABCs dividend policy is to distribute 33% of PAT in the form of dividends up from 25% due to strong cash generation.

One Pound Premise – here is another Buffett measure. Does the company generate more than one Pound in market value per Pound of retained earnings ? In ABCs case the answer is a definite yes – are you sitting down ?

For every 100p in retained earnings ABC has added 786p to the market cap – that is a very strong performance.

Management:

Chairman – David Cleevely, PHD, 54 – Founded Analysys Ltd in 1985, sold in August 2004. Founder of Abcam together with Johnathan Milner & Tony Kouzaride.
It looks like Analysys Ltd will not be the only company that Cleevely will sell as there has been a number of offers for ABC already:

http://www.advfn.com/p.php?pid=nmona&cb=1197538817&article=21620375&symbol=L%5EABC

CEO – Johnathan Milner, PHD, 43 – Up until founding Abcam in February 1998, Milner was a research fellow at Cambridge University.

FD – position was occupied by Eddie Powell, PHD, FCA, 59 –. Powell was with the company for 8 years and has decided to take a career break.

New FD is Jeffrey Iliffe:

http://www.advfn.com/p.php?pid=nmona&cb=1197539043&article=23126987&symbol=L%5EABC

Valuation:

You’d be thinking that a company like this has to be trading on a hefty premium. Well the answer is both yes and no.

Current forecasts are as follows:

Year Ending Revenue (£m) Pre-tax (£m) EPS P/E PEG EPS Grth. Div Yield
30-Jun-08 31.40 6.20 12.90p 25.4 3.3 +8% 4.10p 1.3%
30-Jun-09 39.50 8.70 18.00p 18.2 0.5 +40% 5.80p 1.8%

Which on a current price of 330p, gives a forward P/E of 18.33 which is fairly hefty. Don’t forget Slater likes his P/E’s to be below 20 so ABC just scrapes in. On 40% growth that gives a lovely PEG of say .46.

ABC trades on a premium of 5.2X Book Value for 2008. However this should drop much lower for the current year due to the new facilities and spending on equipment and infrastructure.

On a market cap of Stg 115m and an estimated Turnover for 2009 of Stg 39.5m,. ABC trades on m.cap / Revenue ration of 2.91 times.

The verdict:

Looking towards the future I think this company is well positioned to increase market share. I am not looking at ABC as a quick trade but more of a medium term play as a hold for up to 3 - 5 years.

With 50% of the sales products produced in-house margins should rise substantially and coupled with expansion into East Asia, the fastest growing antibody market in the world, ABC should be able to increase sales fairly easily over the next few years. The HTP facility is expected to add 35,000 high margin products to the catalogue over the next 5 years so ABC has it all to play for.


Short descriptive video: http://iball.iii.co.uk/2008/02/11/abcam-plc-abc/