Author Topic: HTL - Hamilton Thorne  (Read 1485 times)

Gregmal

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HTL - Hamilton Thorne
« on: August 09, 2018, 05:45:37 PM »
Hamilton Thorne represents what is possibly one of the most compelling investment opportunities I have ever come across and at a minimum expect a 5 bagger but would not be shocked to see 10-15x your money from today's prices over the next decade. This is a company that I believe has a very strong possibility to grow organically at a mid-high teens rate, grow further through savvy acquisitions, and also see further benefits from margin expansion. I believe HTL is immediately worth at least $200M USD or $1.85 a share for the OTC listed HTLZF currently trading around .72 cents. The TSX trading HTL in this case currently trading around .95 cents should trade for about $2.45.

Now that I have made that clear, I’ll explain the many facets of this company that are so interesting.

First. Why does this exist?
This is the type of company that at first glance deserves to be on the TSX. Myriad red flags and things one normally looks for in a short will easily defend the castle from less sophisticated and lazy shareholders. Examples include

Red Flag #1
-Company went public as reverse merger
Why it doesn’t matter- Nobody was going public, in any way during H1 2009, let alone a nano cap IVF company in early stage development

Red Flag #2
-Trades on TSX
Why it doesn’t matter-This was simply the bi-product of the company it merged with. Hamilton Thorne, from what I understand, expects to uplist a major US exchange in the next 12-18 months.

Red Flag #3
The company is a roll up
Why it doesn’t matter- HTL has a very selective and disciplined acquisition strategy and only swings big when it is a no brainer. Typical acquisitions involve paying between 4-5x EBITA for private businesses that trade at 6-8x multiples as public companies. Private to public arbitrage. They also seek to retain top talent of the acquired company and often have gotten unique deals because of this. For instance, Gynamed, they were not even the highest bidder however where chosen because two Gynamed partners wanted out and the third wanted to keep running the business. HTL provided an attractive option that accommodated all 3 and thus got the business IMO 25-35% cheaper than it should have sold for.

Red Flag #4
Shares trade under $5
Why it doesn’t matter-I typically avoid single digit stocks and I know most institutions do as well. However this is simply the result of how the company went public it upon an uplisting a reverse split is likely occurring.

Red Flag #5
Company recently hired an investor awareness firm aka a “stock promoter”
Why it doesn’t matter- I have been following this for a while and this was all part of management’s plan to raise awareness leading into an eventual up listing. The “awareness” company was also instructed to promote HTL to only institutional business, not retail as is typically the case with stock promotion. My understanding is that it was only a two month campaign and was less than $8,000 a month cost, not anywhere near the levels or costs of dirty promotion activity.

Additional Confusion Causing Flag
Because HTL is an American company trading on the TSX, many times revenue figures that are USD get reported in CAD and thus mask how cheap the company is.

Now, why is it attractive?

First, I’ve always thought IVF had a massive runway. People are getting married and having children(not always occurring in lockstep) at older and older ages. Additionally fertility issues and health problems continue to increase on a percentage of population basis which will provide a long a fertile runway for Assisted Reproductive Technologies. If there is one area of healthcare where there isn’t a massive rain cloud of political animus and price gauging fury, it is IVF. Because, well, poor people with fertility issues should be able to have babies too… We are seeing increased coverage for these things and many employers(for example SBUX offers full coverage for even part time employees) are now promoting pro IVF healthcare plans.

David Wolf and management are lights out. The returns since Wolf took over in 2011 are outstanding. I’d be hard pressed to find a better performing equity. He is highly experienced in the M&A field, and highly discipled. He is not likely to acquire money losing business, make acquisitions just to grow the size of the company, or do anything out of boredom like many management teams do.

HTL is incredibly well diversified with next to no large customer concentration risk. Additionally from the clinical end, business tends to be sticky with lots of selling synergies as HTL continues it’s bolt on acquisition strategy. For the end user, IVF is also very sticky. Initial runs can cost between $15,000-$30,000 and subsequent ones $5,000-$10,000. Further, the success rate is also increasing(currently in the ballpark of 40% but this varies based on age), but it is not uncommon for significant repeat business simply because the pregnancy fails, or the parents want to have another child, or both. Also, over 60% of current revenue is now higher quality and recurring. Regulatory wise, there are utterly massive barriers to entry here.

This is a company with essentially no listed competition in the US and globally the only peer is Vitrolife which trades at over 3x the multiple HTL does. HTL will likely grow minimum low teens organically for the next decade and margin expansion should continue in the same manner it did for Vitrolife as they grew there business line and benefited from acquisition synergies. Continued acquisitions of profitable, tuck in businesses at outstanding multiples will only further fuel the rocket ship. But until then it is still substantially undervalued on a “today’s valuation” basis largely because of all the red flags mentioned above and once removed and the US uplisting occurs, I believe the party just starts.

My apologies for the poor format. I’ve been meaning to write this up for months but have been tied up with other stuff and possibly spending too much time in the Politics section…

FD: I am obviously long this stock
« Last Edit: August 09, 2018, 07:31:27 PM by Parsad »


maybe4less

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Re: Hamilton Thorne- HTL, HTLZF
« Reply #1 on: August 09, 2018, 07:05:35 PM »
Hamilton Thorne represents what is possibly one of the most compelling investment opportunities I have ever come across and at a minimum expect a 5 bagger but would not be shocked to see 10-15x your money from today's prices over the next decade. This is a company that I believe has a very strong possibility to grow organically at a mid-high teens rate, grow further through savvy acquisitions, and also see further benefits from margin expansion. I believe HTL is immediately worth at least $200M USD or $1.85 a share for the OTC listed HTLZF currently trading around .72 cents. The TSX trading HTL in this case currently trading around .95 cents should trade for about $2.45.

Now that I have made that clear, I’ll explain the many facets of this company that are so interesting.

First. Why does this exist?
This is the type of company that at first glance deserves to be on the TSX. Myriad red flags and things one normally looks for in a short will easily defend the castle from less sophisticated and lazy shareholders. Examples include

Red Flag #1
-Company went public as reverse merger
Why it doesn’t matter- Nobody was going public, in any way during H1 2009, let alone a nano cap IVF company in early stage development

Red Flag #2
-Trades on TSX
Why it doesn’t matter-This was simply the bi-product of the company it merged with. Hamilton Thorne, from what I understand, expects to uplist a major US exchange in the next 12-18 months.

Red Flag #3
The company is a roll up
Why it doesn’t matter- HTL has a very selective and disciplined acquisition strategy and only swings big when it is a no brainer. Typical acquisitions involve paying between 4-5x EBITA for private businesses that trade at 6-8x multiples as public companies. Private to public arbitrage. They also seek to retain top talent of the acquired company and often have gotten unique deals because of this. For instance, Gynamed, they were not even the highest bidder however where chosen because two Gynamed partners wanted out and the third wanted to keep running the business. HTL provided an attractive option that accommodated all 3 and thus got the business IMO 25-35% cheaper than it should have sold for.

Red Flag #4
Shares trade under $5
Why it doesn’t matter-I typically avoid single digit stocks and I know most institutions do as well. However this is simply the result of how the company went public it upon an uplisting a reverse split is likely occurring.

Red Flag #5
Company recently hired an investor awareness firm aka a “stock promoter”
Why it doesn’t matter- I have been following this for a while and this was all part of management’s plan to raise awareness leading into an eventual up listing. The “awareness” company was also instructed to promote HTL to only institutional business, not retail as is typically the case with stock promotion. My understanding is that it was only a two month campaign and was less than $8,000 a month cost, not anywhere near the levels or costs of dirty promotion activity.

Additional Confusion Causing Flag
Because HTL is an American company trading on the TSX, many times revenue figures that are USD get reported in CAD and thus mask how cheap the company is.

Now, why is it attractive?

First, I’ve always thought IVF had a massive runway. People are getting married and having children(not always occurring in lockstep) at older and older ages. Additionally fertility issues and health problems continue to increase on a percentage of population basis which will provide a long a fertile runway for Assisted Reproductive Technologies. If there is one area of healthcare where there isn’t a massive rain cloud of political animus and price gauging fury, it is IVF. Because, well, poor people with fertility issues should be able to have babies too… We are seeing increased coverage for these things and many employers(for example SBUX offers full coverage for even part time employees) are now promoting pro IVF healthcare plans.

David Wolf and management are lights out. The returns since Wolf took over in 2011 are outstanding. I’d be hard pressed to find a better performing equity. He is highly experienced in the M&A field, and highly discipled. He is not likely to acquire money losing business, make acquisitions just to grow the size of the company, or do anything out of boredom like many management teams do.

HTL is incredibly well diversified with next to no large customer concentration risk. Additionally from the clinical end, business tends to be sticky with lots of selling synergies as HTL continues it’s bolt on acquisition strategy. For the end user, IVF is also very sticky. Initial runs can cost between $15,000-$30,000 and subsequent ones $5,000-$10,000. Further, the success rate is also increasing(currently in the ballpark of 40% but this varies based on age), but it is not uncommon for significant repeat business simply because the pregnancy fails, or the parents want to have another child, or both. Also, over 60% of current revenue is now higher quality and recurring. Regulatory wise, there are utterly massive barriers to entry here.

This is a company with essentially no listed competition in the US and globally the only peer is Vitrolife which trades at over 3x the multiple HTL does. HTL will likely grow minimum low teens organically for the next decade and margin expansion should continue in the same manner it did for Vitrolife as they grew there business line and benefited from acquisition synergies. Continued acquisitions of profitable, tuck in businesses at outstanding multiples will only further fuel the rocket ship. But until then it is still substantially undervalued on a “today’s valuation” basis largely because of all the red flags mentioned above and once removed and the US uplisting occurs, I believe the party just starts.

My apologies for the poor format. I’ve been meaning to write this up for months but have been tied up with other stuff and possibly spending too much time in the Politics section…

FD: I am obviously long this stock

It's an intriguing company and thesis. The roll-up aspect concerns me though. I was all set to give them the benefit of the doubt until they announced this acquisition last month:

"Hamilton Thorne Ltd. (TSX-V:HTL), a leading provider of precision instruments, consumables, software and services to the Assisted Reproductive Technologies (ART) and developmental biology research markets, today announced that it has completed the acquisition of the ZANDAIRTM line of air purification equipment and related consumables and services business from Zander Scientific, Inc.

“The ZANDAIR line of air purification systems are proven performers in the ART market, with installations in hundreds of laboratories worldwide,” stated David Wolf, President and CEO of Hamilton Thorne. “It is well known that maintaining a clean environment in the ART lab, free of Volatile Organic Compounds (VOCs) and other contaminants, is essential to embryo health. The addition of the ZANDAIR product line is consistent with our commitment to quality in the ART laboratory.”

https://globenewswire.com/news-release/2018/07/19/1539862/0/en/Hamilton-Thorne-Acquires-ZANDAIR-Air-Purification-Products-Business.html


Pretty bogus IMO to suggest that air purification has natural synergies with IVF/ART. IT's a small acquisition to be sure (although then why put out a press release?), but it suggests to me they are not (no longer?) very disciplined in their acquisition strategy.
 

Lakesider

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Re: Hamilton Thorne- HTL, HTLZF
« Reply #2 on: August 09, 2018, 07:26:07 PM »
I dont know about bogus. Seems that they are air purification systems for labs.

If they are supplying the other lab equipment its not so bogus that they sell the air purifiers too? If they sell the units they can also sell the consumables for them too.

Gregmal

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Re: HTL - Hamilton Thorne
« Reply #3 on: August 09, 2018, 07:36:15 PM »
My first thoughts were a little similar. But then I realized that this acquisition is pretty symbolic of the company as a whole. On the surface some kind of fuzzy looking stuff and some question marks. But after diving in deeper you kind of see more of what there is to like about this company. This is a sub $1m deal at a reasonable multiple. They already have a significant global network where they can plug in this product and instantly ramp sales. It's not like these are Home Depot air filters. They are a leading brand for clinics and research labs.

kab60

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Re: HTL - Hamilton Thorne
« Reply #4 on: August 09, 2018, 11:13:54 PM »
Thanks for the writeup, couple of questions;
How do you value this?
Are interests aligned? How much does management own? How is comp set up/incentives? (I think it is very important - espescially in rollsups, since they usually blow up)
Thanks

Spekulatius

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Re: Hamilton Thorne- HTL, HTLZF
« Reply #5 on: August 10, 2018, 04:25:56 AM »
I dont know about bogus. Seems that they are air purification systems for labs.

If they are supplying the other lab equipment its not so bogus that they sell the air purifiers too? If they sell the units they can also sell the consumables for them too.

Air purification is a huge field with many large players. There is nothing specific about air purification related to IVF. I don’t think the consumables follow the razor/bode model either. the consumables are mostly HEPA filters and there are a bunch of well established players (MMM etc) and the sizes are standardized.
To be a realist, one has to believe in miracles.

Gregmal

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Re: HTL - Hamilton Thorne
« Reply #6 on: August 10, 2018, 05:50:59 AM »
Thanks for the writeup, couple of questions;
How do you value this?
Are interests aligned? How much does management own? How is comp set up/incentives? (I think it is very important - espescially in rollsups, since they usually blow up)
Thanks

I think at this point HTL should be valued with a weighting reflecting it's value as an M&A target. Last couple deals I've seen for similar companies have taken place in the 5-7x revenue range. For instance, the recent acquisition of Lifeglobal, took place at 7x.

http://investor.coopercos.com/news-releases/news-release-details/cooper-companies-acquires-lifeglobal-group-expanding-fertility

"LifeGlobal had annual revenues of approximately $24 million in calendar 2017, and is forecasted to grow in the mid to upper single digits over the coming years. "

Whereas HTL will eclipse $30M easily this year and is growing at more than twice what Lifeglobal is.

Management is very well aligned here. Insiders own more than 25% of the company and many have put their life work into this. The current management team IMO has a tremendous mix of scientific/R&D and capital markets/public company experience. The board has a similar composition.

KJP

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Re: HTL - Hamilton Thorne
« Reply #7 on: August 10, 2018, 05:58:40 AM »
Thanks for bringing up this company.  For those interested, there's more background on the industry and M&A at the writeup available here:  https://www.altafoxcapital.com/research/

writser

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Re: HTL - Hamilton Thorne
« Reply #8 on: August 10, 2018, 12:32:47 PM »
Hamilton Thorne represents what is possibly one of the most compelling investment opportunities I have ever come across and at a minimum expect a 5 bagger but would not be shocked to see 10-15x your money from today's prices over the next decade. This is a company that I believe has a very strong possibility to grow organically at a mid-high teens rate, grow further through savvy acquisitions, and also see further benefits from margin expansion. I believe HTL is immediately worth at least $200M USD or $1.85 a share for the OTC listed HTLZF currently trading around .72 cents. The TSX trading HTL in this case currently trading around .95 cents should trade for about $2.45.

How do you arrive at immediately 'at least' $1.85? I see 116m diluted shares, a small net debt position so that's around $215m EV for a EV/sales valuation of ~7x? Seems rich. It's more or less the bull case for a 2020 acquisition price in the Alta Fox presentation from a few months ago.

Interesting idea. Insiders own a decent amount of shares, business seems decent and I'd guess in a good sector. Air purification systems was only a small transaction and might make sense if you want to offer a 'complete' solution. But I wouldn't exactly call it cheap.
« Last Edit: August 10, 2018, 12:35:59 PM by writser »
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Gregmal

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Re: HTL - Hamilton Thorne
« Reply #9 on: August 10, 2018, 12:47:18 PM »
Hamilton Thorne represents what is possibly one of the most compelling investment opportunities I have ever come across and at a minimum expect a 5 bagger but would not be shocked to see 10-15x your money from today's prices over the next decade. This is a company that I believe has a very strong possibility to grow organically at a mid-high teens rate, grow further through savvy acquisitions, and also see further benefits from margin expansion. I believe HTL is immediately worth at least $200M USD or $1.85 a share for the OTC listed HTLZF currently trading around .72 cents. The TSX trading HTL in this case currently trading around .95 cents should trade for about $2.45.

How do you arrive at immediately 'at least' $1.85? I see 116m diluted shares, a small net debt position so that's around $215m EV for a EV/sales valuation of ~7x? Seems rich. It's more or less the bull case for a 2020 acquisition price in the Alta Fox presentation from a few months ago.

Interesting idea. Insiders own a decent amount of shares, business seems decent and I'd guess in a good sector. Air purification systems was only a small transaction and might make sense if you want to offer a 'complete' solution. But I wouldn't exactly call it cheap.

Your are right. As I mentioned I'd been working on this for a while and as it's gone up had to make adjustments so the exact figures are just quick, kind of lazy "in the ballpark" figures. I think a lot of the report you mentioned is good, but I don't think it gives enough credit. I've looked at a lot of the comp M&A deals and the Lifeglobal IMO is easily the most appropriate in terms of asset mix and business composition. I would definitely think closer to the 7x number than the lower end of 4-5x other not as comparable deals have taken place.

My main focus as an investor is and would be this, You have two layers of undervaluation here. There is the "what it is worth now" scenario which should become apparent once all the masking agents dissipate. That number IMO is easily double the current share price and just needs time to correct. That should be your base figure. Then, on top of that, you have the high teens annual growth rate and significant margin expansion to be excited about, IMO for the next 5-10 years.

The reasons some of these businesses are tricky is because its in many cases about management, execution, and scale. I look at it like this. Say you are looking at a gigantic 15,000 sq ft, state of the art mansion in the middle of an Oklahoma farm district. Its worth $5m. Say you had the ability to buy it for that and then drop in on the shoreline in South Beach Miami. Value creation just by bringing the product to a different location. With some of these smaller businesses, provided you have robust execution and grade A management, that is what you can do through acquisitions. David Wolf is a champ and I have no reason to believe he can't keep ding this.