V.HTL: Hamilton Thorne Expanding In The Reproductive Space With The Accretive Acquisition of Embryotech Laboratories

By Anita Dushyanth, PhD

TSX:HTL.V

Hamilton Thorne (TSX:HTL.V) continued to expand its market into reproductive services by acquiring Embryotech Laboratories (private), a Massachusetts based provider of quality control testing services and materials, for $ 7.25 million.  Hamilton Thorne paid less than 4x EBITDA and less than 2x sales (based on Embryotech s trailing twelve months EBITDA and revenue) for this acquisition. Hamilton Thorne’s shares jumped nearly 45% on September 16, 2016 after the news was announced that morning.

The financing for the deal came from a mix of existing cash, a new debt facility and common stock.  For the transaction, Hamilton Thorne paid $ 6 million in cash and issued 7.7 million common shares at a price of CDN$ 0.198/share.  The firm secured a term loan of $ 5.5 million from Middlesex Savings Bank that bears interest at a rate of 4.25% per annum, and matures on September 15, 2021.  The bank also provided a revolver of up to $ 2.5 million, which could be renewed annually if approved by the bank, that bears interest at the rate of 3.5% per annum and matures on September 15, 2018.  The company drew $ 1.5M on the revolver and refinanced its existing loan with the new debt facility.

Hamilton Thorne has an avid acquisition program. Embryotech primarily provides testing services to life science companies and was on HTL.V s list of opportunities for more than a year. Embryotech provides quality control services and testing assays to the Assisted Reproductive Technologies (ART) laboratories. Embryotech sells mouse and hamster embryos to some of the prominent life sciences organizations that use them to test for toxins. Embryotech is about 34% of Hamilton Thorne s $ 19.4 million market cap.  As it is, Hamilton Thorne rakes in ~$ 9 million in annual revenues and ~$ 1 million in EBITDA.  With the acquisition of Embryotech, the benefits are manifold:

1. Embryotech is an established company in the animal research space and has been profitable since it was founded in 1994.

2. The acquisition is minimally dilutive as the company leveraged existing capital and secured a new debt facility.

3. The acquisition diversifies and broadens Hamilton Thorne s existing business.

4. The company estimates a 40% increase in recurring revenue from the sales of services and consumables.

5. The company anticipates more than a 50% increase in 2017 revenue and more than 100% increase in 2017 EBITDA.

Even though the deal closed as of September 16, 2016 the improvement in the toppling number will not be apparent in Q3 2016 as only two weeks remain for third quarter to end. Further, the small percentage of revenue that will be recognized during this period will be offset by the expenses related to the acquisition.  Although the acquisition is only 34% of the total market cap, Embryotech has generated positive cash flow for a long period of time and will add significantly to Hamilton Thorne s bottom line. As a result, we expect to see EBITDA double from Q4 2016 onwards.

Valuation:
Thus far, the firm has acquired products to broaden their portfolio of reproductive systems.  The integration with Embryotech bodes well for Hamilton Thorne and they’ve just begun to scratch the surface on acquiring complementing opportunities.  We have revised our financial model and forecasted 50% increase in revenue beginning Q4 2016 going forward largely based on the potential revenue that will be brought in by the recent acquisition. We project EPS of $ 0.05 for 2017 which is more than 2015 numbers.  As the company continues to invest in immediately accretive assets, we expect to see widening of gross margin and operating margin.

Our revised outlook values Hamilton Thorne at $ 0.80/share.

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