Tepnel buys Orchid Biosciences

In case any of you were interested I am including my own analysis as why I think Tepnel's shares are significantly undervalued.


Year Revenue Net Profit(pre-exceptionals) EPS
2005(A) £13.6m £-1.07m -0.05p
2006(E) £17m £0.30m 0.01p
2007(E) £20m £1.2m 0.04p
2008(E) £24m £1.75m 0.06p
2009(E) £28m £2.5m 0.09p
2010(E) £33m £3.25m 0.11p

EPS = net profit / no of shares

Now we must consider the outstanding warrants being converted which of course would provide additional cash inflow for Tepnel.
2 Nov 2004 £4.2m placing - 74.5m warrants at 6.98p - £5.2m cash inflow for TED
2 Jun 2006 £1.2m placing - 4.25m warrants at 8.05p - £342K cash inflow for TED
TOTAL 78.75m warrants (approx £5.5m cash inflow for TED)

Currently, 230m shares and a market capitalisation of £18m.

It seems as though as the number of shares has risen from 209m earlier this year to 230m so some of the warrants seem to have already been exercised. I will clarify this with the company.

If warrants taken up as shown above would bring the total number of shares to 287m shares in total. If we assume for evaluation purposes only that all the additional warrants are taken up in 2006 I have based by EPS using these no of shares (i.e. net profit figure / 287m shares).

Should be valued on 4 times turnover for a Biotech company in this position - i.e. profitable with significant growth prospects. This is known as EV/Sales ratio. Again if we use 287m shares (i.e. including warrants) for this calculation:

2005 £13.6m - should have a mrkt cap £54m (equiv. 19p)
2006 £17m - should have a mrkt cap £68m (equiv. 23.7p)
2007 £20m - should have a mrkt cap £80m (equiv. 27.9p)
2008 £24m - should have a mrkt cap £96m (equiv. 33.5p)
2009 £28m - should have a mrkt cap £112m (equiv. 39p)
2010 £33m - should have a mrkt cap £132m (equiv. 46p)

To give you an idea companies comparable to Tepnel have the following EV/Sales Ratios with as stated the sector average being 4:
Third Wave Technologies (TWTI) 3
Digene (DIGE) 5
Axis Shield (ASD) 3

Please note, if we perform this for Tepnel. Current share price is 8.12p. There are 230m shares. Current market cap of £18m. In last financial year 2005 revenue of £13.6m. Therefore, EV/Sales ratio for TED is £18m / £13.6m = 1.32. This is far too low!!!!!!

Also we must consider that Tepnel has no debts, and has a total of £24m worth of losses according to the 2005 annual report. Based on this at least during the period 2006-2010 Tepnel despite being profitable would not have to pay any tax on profits.

The company also has worked itself into a +ve cashflow position at the end of 2005 / beginning of 2006. Therefore, unless the company plans to make any significant M&As in the next year or two Tepnel should be self-funding from this point onwards. Furthermore, the companies main objective in 2006/2007 should be fully integrating the existing M&As, and completing the construction of the Livingstone site. Only once all existing M&As are fully integrated would it make sense for the company to make any further significant M&As. The M&As that have been made over the last couple of years have been superb and helped the management turnaround what was an ailing business.

Personally, I believe the company has turned around, and after many false dawns finally will be announcing its profitability for the full year in 2006 (already partially done so at the interims).

That is not to say that I fully trust the mgmt on all aspects yet after some of the recent issues we are aware of over the last couple of years, especially from a corporate compliance perspective. However, I have to say despite this Ben and his mgmt team have performed a good job turning around the business over the last couple of years.

All figures, facts & thoughts are my own - so please do not see these as guaranteed.

I am personally confident look forward and hope for the first time in many years see a sustained upwards movement in the shareprice of Tepnel. It's re-rating is imminent IMHO if the company does continue to deliver.

The company delivered its first maiden profit of £45K for first 6 months 2006.

Hope you find my analysis useful, and explains why I think the current share price is significantly undervalued by substantiated reasoning.

TTNY