BELL-issimo
Is the pull back a last hurrah before this flies? Or has someone called time?
Assessment of H1 Results, Progress and the Share Drop
Belluscura has pulled back 20%. What should you do?
BELL announced its H1 results and disappointed with sales of “only” $0.4m. Clearly some people sold up on the news. Is this outcome relevant? Should we worry? Have people misunderstood? Let’s look at what the company say first of all.
The reasons for poor sales were due to:
Early sales were discounted
Sales halted until April 2023 for fine tuning of X-Plor (2 months only)
Work was being done on Discov-R
They were recruiting a new Head of Sales Bob Fary (and then on boarding him)
Inventory was accumulated in this period.
But let’s rewind a month. The August 16th announcement of 6,500 Discov-R was *significant*. The company gave estimates that the majority of sales would be X-Plor and just a small number of Discov-R and this was because of a KEY PHRASE Discov-R is "A BETTER FINANCIAL OPTION" (to quote the RNS):
Its use for CMS E1390 (stationary) and E1392 (portable) reimbursement codes, making the DISCOV-R a better financial option for the thousands of homecare oxygen providers. It will also produce nearly three times as much oxygen by weight than its dual flow competitors.
Did people have a brain fart when they saw the $0.4m sales and forget about this news? This news is in the H1 report - buried in there. For example:
1. In Line
"Trading since the period end is in line with our expectations for the full year which is significantly second half weighted"
Expectations were $3m sales minimum for 2023 so that suggests $2.6m in H2 and equates to an annualised run rate of $5.2m/year
2. X-Plor demand is growing
"Demand for X-PLOR®, which is predominantly a Direct-to-Consumer unit, is growing, and we expect that our affiliation with GoodRX, and our own direct sales will lead to significantly higher Gross Margins as we utilise the Company's previously high inventory levels."
In other words some of the H1 "loss" includes what should really be H2 direct costs. So taking the $2.6m less $6m admin costs the out turn for FY2023 should be an EBITDA of -$3.4 (so -$6.4m vs -$6.5m per Dowgate for FY2023 overall)
Let’s not forget, too, the other news from 2 weeks ago. A $55m minimum royalty agremeent over 10 years. What’s the implication of that compared to the H1 $0.4m sales?
3. Asia Demand
"The demand and orders already received for DISCOV-R are very exciting, and we believe the signing of the groundbreaking Exclusive License and Royalty Generating Agreement with InnoMax, an affiliate of the world's leading electronics manufacturing company, will be transformational for the Group."
4. Minimum Royalties
Dowgate have only factored in the minimum royalties starting October 2023. They say: “We have set licence income equal to the minimum guarantee and excluded the profit share from accessory sales. We see scope for royalty income & profit share to materially exceed this cautious assumption”
Rather than ignore them I’ve sought to factor them in. More on that later.
5. Bell’s sizeable ally
First, it would be worth reminding ourselves exactly who are Innomax? InnoMax are 2 organisations – it’s a joint venture between MaxNerva Technology Services Limited, owned by Hon Hai (also known as FoxConn), and a government body - the National Center for the Advanced Medical Devices (“NMED”), which is located in Shenzhen in China. MaxNerva’s 2022 accounts show £50m assets, £60m turnover. But FoxConn’s revenue exceeds US$213bn/year.
6. Services Upside
Are Bell selling Oxygen Gadgets – or also selling Software and Services
"The Company is already working on the next-generation NOMAD app that will alert patients when their blood oxygen saturation level has varied beyond parameters set by their doctor, which is expected to help patients better monitor their conditions, but also improve the efficiency of the device by delivering supplemental oxygen as needed."
This is the next aspect which will prove a game changer. The logical progression from mastering this "telehealth" capability in Oxygen Supply, would be to roll it out in the future to CPAP machines, Diabetes monitors, Pacemakers and all manner of health devices.
This plan is a cornerstone to BELL’s admission document - this is what they saw back in 2021.
If BELL provide some form of subscription model for this then the revenues are not just about units sold. You can't just think of this company in those terms. It has an opportunity to generate valuable recurring revenues and to licence its technology. When you look at the wider subscription and licencing opportunities (which Bob actually alludes to if you listen to his last Pox Markets interview with Paul) then you are getting this in the price for FREE. Remember Apple made lots of money from selling lots of iPhones. But how valuable was the App Store? The answer is $85bn/year of revenue and growing. To illustrate this, the revenue Apple gets every 6 hours is equal to the entire market price of Belluscura.
No revenue from services are assumed in my calcs for FY23, FY24 or FY25, nor are other products considered - all of which offer upside to the future of BELL.
6. Oak Bloke - Revenue & Gross Profit Modelling FY2023 & 2024
FY2023 Profitability:
On the basis that we are seeing actual production of Discov-R by end of Q3 and on a 6k units per annum capacity for the US factory, existing orders will be 50% fulfilled Q4 and 50% Q1 of 2024. That's before any further orders during 2023.
Working on a China 6k, USA 6k capacity (for now) then 2023 will comprise 25% Discov-R @ $2500 and 75% X-Plor. Remember, 25%/75% is pessimistic - there’s reasons to think it could be a higher Discov-R percentage mix. Dowgate's per unit sales therefore is far too low. The average $1180 revenue per unit for 2023 will be $1,450 by my estimates. ($2,500x0.25 + $1,100x0.75)
For China, I’m assuming $110/unit profit share for X-Plor and $250/unit for Discov-R (10% of RRP). This info isn’t disclosed but it seems a reasonable assumption.
FY2024 Profitability:
USA:
Going forwards to 2024 Dowgate assumes an average $1400/unit. But (pessimistically) I’m assuming a 50/50 mix of X-plor and Discov-R (it could be much higher in favour of Discov-R.... the order books suggests so!). If that's true then $2500+$1100/2 = $1800 revenue/unit. Assuming 10,000 units (the 20k forecast split 50/50) can be achieved (so that's a 66% increase in production) then we are looking at a $36m revenue and a GP of $11.2m so less $8.6m Op Costs an $2.6m EBITDA. Net cash of $2.1m assuming $2m investment.
China:
But we need to consider China. There are 6X the need. The people behind Innomax are huge. So I think my 2024 numbers are extremely conservative when I model 25,500/units sold in 2024, not 10,000. They are on a royalty agreement where delay will cost millions. On top of royalties (you’ll notice I’ve modelled 2024 to be $4m and I’m not assigning any cost against that income.
EBITDA contribution of $11.2m so total $13.8m for 2024.
Since production is managed by China that translates to $13.3m cash.
Assuming administration jumps by 50% (pessimistically) then FY2024 net profit is around $4m or £3m putting this on a forward PE FY2024 of about 20.
FY2025 Profitability:
When I modelled this previously I arrived at a jaw-dropping EV/EBITDA of 1.5 in 2025.
That was based on a 50/50 product mix in 2025 ($1800 revenue/unit) and 40k units sold from the US (to the US, Europe and UK).
US Gross Profit grows to $41m. Less Op Costs of $10m and admin of $10m is $21m
…. BUT THAT’S BEFORE CHINA!
A growing royalty and profit share for FY2025 could put this on a net profit of $30m-$40m after tax.
On a PE of 15x-20X that would put BELL at over 6X its current market price.
($30m is ~£24m x 15 = £360m. £360m/£55m = 6.5x)
($40m is ~£32m x 20 = £640m. £640m/£55m = 11.8x)
Bob ends the H1 results saying:
“The Company is well positioned to deliver substantial growth in the coming years, and we look forward to the future with confidence.”
…..I certainly do.
My posts are written for my benefit, to set out my investment rationale. I state facts and source them where possible. I also use words like “infer” and “think” which means it’s a (reasoned) opinion based on a fact. Investment requires filling in the gaps with inferences and thinking about the facts to form forecasts. I hope you enjoy what I write and find it useful in forming your own investment rationale.
Thanks