I recently read an article on Kelpie Capital discussing Sagentia Group which I thought sounded like a great potential investment hence I’m doing my own analysis of it.
Some useful links
Sagentia is a research and development consultancy business providing services from market analysis to product development and manufacturing. The business operates in Medical, Consumer and Industrial Sectors. Around half of the business is in the USA. There isn’t much else to say about their background than was already mentioned in the link above. They have undergone a dramatic turn around in the last few years and are now far more profitable.
The interim results show revenues and profits to be slightly down but this is not overly concerning.
In 2010 Martyn Ratcliffe bought a 30% stake in the company and became chairman of the board. He is chairman of two other companies, Microgen plc and RM plc. Another noteworthy board member is Keith Glover who is a Fellow of the Royal Society and a Fellow of the Institute of Electrical and Electronic Engineers.
A large share buyback has been initiated, as well as an indication that they may soon begin to pay dividends.
Financials & Valuation
There are three aspects to this business from a financial perspective.
First is the cash on the balance sheet, which the board has clearly indicated is for acquisitions, growth and share buybacks/dividends.
Second is the operating business, which at the moment produces positive cash flows from their R&D contracts. This also has considerable tax assets if profitable in the future.
Third is the freehold property which they hold and receive rents from for sub-letting. The 2011 annual report states that this was last revalued in July 2010 and they believe its book value represents fair value.
I usually do a 10 year history of a companies financials in an analysis but for this company it does not appear to be necessary. The table below just shows some summary financials for the last couple of years.
Firstly, looking at the rents and carrying value on the balance sheet, it seems a fair valuation and if we account for the fact that Sagentia themselves also reside in this building I think the carrying value is fair and will value it as such.
Also from the last trading update net cash was £13.2m, but don’t be alarmed they have spent over £2m on share buybacks since their annual report.
The remaining value is from the operating business, which is generating owners income of around £1.9m. This is the trickiest part to value. On the one hand, they could grow the business and services businesses do have some protection against inflation over time. On the other hand they could lose contracts and earnings could be erratic. I am not going to assume any growth and I will use a discount rate of 12%, slightly higher than my usual 10%.
We also must not forget that eventually if they do consistently make profits then they will pay tax. To value this I will use the Net Present Value calculated by Kelpie of £2.9m and reduce owners income by an appropriate tax rate. Looking at similar companies in the sector, a tax rate of roughly 30% seems common and we may assume this rate for when their deferred tax assets have expired. This is higher than the UK corporate tax rate so is a conservative estimate in my opinion.
That leaves £1.32m in owners income after tax to be capitalised at 12% which is £11m. Add this to £13.2m in net cash, £2.9m for the tax assets and £14.1m for the property gives a valuation of £41.2m.
I consider this company a good candidate for a long term holding, hence I wont require a large margin of safety. I consider my valuation to be very conservative with considerable upside if the business can be operated well. Using a 20% margin of safety gives a value of £33m.
I will be looking to add this to my portfolio in the coming weeks as the price is currently very close to a £33m market cap.
Disclosure: Currently no position in SAG.
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