Thread by @stocks102

THREAD: Long Circassia #CIR (market cap: £99m; share price: 25p)

Question: Why buy shares in a business that has lost over £480m - and whose share price is down 95% - since its 2014 IPO?

Answer: Because the business today bears zero resemblance to the business at IPO. In the

last 12 months, the division responsible for the big losses has been sold. There is now net cash. A new, experienced management team oversees the one remaining business (which is a gem). As a bonus, the sole broker has yet to initiate coverage but seems about to do so.

This one remaining business, Niox, is growing fast – a fact previously masked by the dire performance of the other divisions, now sold. And it’s about to display huge operational leverage as it moves into profit for the first time.

Niox produces devices that diagnose asthma.

In a fragmented market, it’s the global leader with 72 patents. Revenues have grown at 15% CAGR since 2010, and it’s performed almost 40m tests since launch. 90% of revenue is recurring (new mouthpieces and sensors are required for each asthma test). Manufacturing is

outsourced, and gross margins are 74%.

Of course, Covid has hit this great business hard. Revenues fell over -30% to £24m in the 12 months to December 2020. Recently, no one has wanted to leave home, go to their GP and ask whether their shortness of breath is indeed asthma.

(Diagnosing asthma is essential. If diagnosed and treated, it’s reversible; if left untreated, it’s irreversible.)

Sadly, shortness of breath doesn’t go away just because you’ve stayed at home, so there’s now a backlog of people who badly need Niox’s test. And Niox’s

installed base of 10,000 asthma-testing devices remain in doctors’ surgeries, awaiting this backlog - once lockdowns end.

Major shareholder Christopher Mills is talking about £40m of sales by the end of 2022. (This makes sense: if there had been no pandemic, and sales had

continued to grow at 15% CAGR from the 2019 level of £35m, then, by 2022, sales would in fact have been over £50m.)

At the £40m sales level, based on a declared cost base of £25m (including Depreciation & Amortisation and HQ costs), there would be £5m of EBIT – and also £5m

of PAT (EBIT and PAT should be the same for years, owing to a tax asset of £61m thanks to the large losses of the past).

15% revenue CAGR from 2023 would mean sales of over £60m, and at least £15m of EBIT and PAT, by 2025 (assuming the cost base grows 20% by 2025). All for a

market cap of £100m, and with perhaps £30m+ of cash by 2025.

Today’s £7m of net cash should be enough to see the group through to profitability. Even if lockdown lasts until the end of 2021, there would be £25m of sales (using H2 2020’s sales run-rate of £2.1m per month) and

£18.5m of Gross Profit, which, after that cost base of £25m, would mean a loss of £6.5m, leaving £0.5m of net cash. If things get tight, Mills is likely to offer more cash (as he did last year, in a £5m fundraise at 24.6p).

FY results are on March 24th, when ‘a further

update on its growth strategy’ will also be announced. It would be a surprise if N + 1, the sole broker, did not initiate coverage then.

The share price now is around the same as when Woodford – a distressed seller whose own firm folded shortly after – sold in 2019. And the

same price as when Pfizer first announced its vaccine. You can’t say that of many such obvious beneficiaries of a post-vaccine world. And, unlike, say, a leisure business, Niox is also a long-term growth business in a recession-proof industry.

Chairman Ian Johnson will

certainly be aiming for a higher share price: his 6m options have an exercise price of 62.4p – despite the stock staying mainly in a 20 – 30p range since he joined. (Johnson turned around, then sold, healthcare firm Bioquell plc in 2016-8, achieving a 250% return for

shareholders from the day he joined. Michael Roller, his FD at Bioquell, is now also at Circassia.)

To find out more, download Vox Markets Podcast episode 2158, for the interview with Christopher Mills. The bit on Circassia starts at 24 mins 45 secs in and last 3mins.

/ends