Post by
stef1234 on Aug 30, 2024 4:56pm
Quick Potential Assessment / Valuation Check
Indeed, the stock has made an incredible run. Is it pure speculation, or reset/repricing related to the next leg of growth ?
CPH is not anymore the deep value stock it was last year. Now, the gears are switching from value to growth. Big boys and growth investors are buying now big time, as you can appreciate the increase in trading volume and stock price. The increase of the share price is probably related as well to brokers research reports/coverage that will increase in a near future. The company has attracted the attention of the analysts community for sure. So, if you have research report, please share on this board to help us doing a deeper dive..
Let’s walk through my analysis and what is my current assessment of the situation.
If we start with the financial forecasts made by management in the Substantial Issuer Bid Circular dated September 6 2023. In that circular, the management made projections EBITDA will be 44M US$ in 2029. Theses projections include the current Cipher business and the revenues projections of MOB-015 in Canada. That is a nice starting point. Moreover, I haven’t add to this amount the potential related to the fact that Sweden Market has expanded 50% because of the success/cure rate of the MOB-015.
Now add to this projection, the acquisition of Natroba. Mull said in an interview during mid-august that ParaPro is an exact mirror of Cipher from a financial standpoint. So, about 22M US$ of revenues and about 14M US$ of EBITDA. Adding that layer, we are getting to 58M US$ of potential EBITDA. Currently the market share of Natroba is around 20% in USA, and Mull said he wants to take over Pyrethrin market share of 75%. So, if all things are equal, and if management is right, Natroba can reach 53M US$ in EBITDA in the USA. It is not impossible that Natroba will grow this US market since the product is more efficient (just like Sweden), but I haven’t factored that in my assessment. So that is an additional 39 M US$ you have to add in EBITDA to the 58 M US$ if CPH is successful in the USA. We are now at 97 M US$ of EBITDA. Add to this amount, the Canadian market for Natroba, about 10% of the size if the US market (about 5M US$ in EBITDA). The count is now at 102 M US$ of EBITDA in 2029 (let’s round down to 100M US$).
That doesn’t stop there. We have to include the International Licensing of Natroba, royalties that will come directly to the bottom line according to Mull during its mid-august interviews. Spend on Medecine worldwide is three time greater than spend in USA. If you consider the approx. 50% margin on Natroba business, we came to the assessment that worldwide market (excluding USA) for Natroba is probably around 200 M$ in sales. If you take 10% royalty rate on sales, then you should add another 20M US$ in EBITDA for the potential of Natroba Worldwide (will flow directly to bottom line according to Mull). Now we are at 120M US$ of EBITDA. And I don’t include the complementary products via acquisitions that Mull wants to add in the USA.
Suppose we stop there, and make a quick sanity check on valuation at that point. This kind of growth deserves at least a 10-12X EV/EBITDA in my mind. At 10x-12x EV/EBITDA, we are getting to 1.2B to 1.44B US$ EV. Craig Mull said on the a mid-august interview that he sees the market cap of CPH getting to more than a billion dollar in not distant future. There we are !! If we suppose management will add some debt, say 100M US$ to finance this growth, then we get a 1.1B to 1.3B US$ market cap. With around 26 M shares outstanding, that means between 42 US$ and 52 US$ per share (57$ CDN and 69$ CDN per share.). That is 3x the current stock price. I do understand there is a lot of assumptions in my back of envelope calculations, but that’s explain why the share price has sky rocketed lately.
But, if we don’t stop there. Mull said on one of its mid-august interviews, that Cipher is aggressively pursuing the acquisition of the MOB-015 rights in the USA. With the current sales platform of ParaPro in the USA, the sales of MOB-015 is a real tangible opportunity for Cipher. Let’s try to assess what this piece of business could be worth for Cipher. In Canada, my estimation is that MOB-015 will generate around 25 M US$ of EBITDA per year for Cipher. US market is 10x bigger. So, an estimated (that is another back of envelope estimate) EBITDA for MOB-015 in USA could be worth 250M US$ for Cipher. If we suppose Cipher pays with debt a 100M US$ a one-shot licence right to Moberg (plus annual royalty fees paid subsequently), then we should add another 250M US$ in EBITDA to the 120M US$ EBITDA above.
We are now at 370M US$ EBITDA in a time horizon of 5-8 years. At 10x EV/EBITDA with a 200M US$ debt, Cipher would then be worth 3.5B US$ of market cap. Suppose no additional shares issued, that means 134$ US (180$ CDN) per share. That is 9x the current stock price.
We can now understand why there is a lot of excitement around the stock in the last few weeks, and why big boys are getting in. For sure, there is a lot of risks on this path, the plan will not go smoothly according to the plan, but the least we can say is the growth runway is fantastic for Cipher and the company isn’t now the same I bought in 2021 at 1.50$. Fasten belt, I believe there will be a lot of volatility going down the road, since this pathway will not be a walk in the park !! If we look at the current financials, yes the stock is expensive, but when we look at the potential, then the stock is still cheap like Mull said it during mid-august.
This is my two cents. Please share any additional thoughts. Am I missing something ? Am I exaggerating something ?