Goldshield Plc

[Simon Gordon]

http://www.goldshieldplc.com

Goldshield are coming through a perfect storm:

- SFO investigation.
- NHS lawsuit.
- Mitza bankruptcy.
- Ephedra banned in USA.

FORECAST - 03/06
PBT - flat at 16.4m
EPS - flat at 33.4
DPS - up 10% to 6.6

P/E @ £3.00 = 8.98
Yield @ £3.00 = 2.2%

STRENGTH
Cash Flow

WEAKNESS
SFO

OPPORTUNITY
Balance Sheet

THREAT
Lack of Focus on Core Business

William Ransom - RNSM - Similar'ish to GSD; it is valued:

03/06
T/O - 32m
PBT - 3.9m
EPS - 4.2
DPS - zilch
P/E - 12.6

03/07
T/O - 38m
PBT - 5m
EPS - 4.5
DPS - zilch
P/E - 11.8

Net debt - 1.9m

Net cash inflow for 03/05 = 1.89m

Market Cap. - 44.7m

GSD - standing PBT of 16.4m.
GSD - had net cash inflow for 03/05 = 19.36m
GSD - has net cash 6m.
GSD - market cap. 110m.

 

[Simon Gordon]

Excerpt from GSD accounts 31/03/02:

So far as concerns that aspect of the SFO investigation which relates to warfarin, the Group believes that this has only very limited application to the Group. The Group had total sales of £6.9 million derived from warfarin during the period under investigation. This equates to 3.7% of the Group's turnover during this period. However, of this £6.9 million, £4.8 million was generated from sales of Marevan, Goldshield's branded version of warfarin. Throughout the period to which the investigation relates, Marevan was sold at prices determined with the Department of Health ('DOH') under the Prescription Pricing Regulation Scheme ('PPRS'). The effect of the PPRS is to prevent the NHS from buying at prices above the PPRS specified levels. Whilst suppliers are free to discount PPRS prices, the Group cannot see that selling at PPRS prices can be considered fraudulent behaviour.

 

[Simon Gordon]

From today's Indy:

Goldshield added 3.5p to 303.5p as gossips talked of strong trading at the generic medicines producer.

 

[Simon Gordon]

Digging deeper into GSD a main area of group weakness is the Direct To Consumer (DTC) of Health Care Products which are mainly nutritional supplements.

As can be seen a continuous drop in turnover is ongoing:

EU TURNOVER
2005 - 16m
2004 - 18m
2003 - 22.1m
2002 - 29.6m

USA TURNOVER
2005 - 6.8m
2004 - 10.9m
2003 - 26.8m
2002 - 26.3m
2001 - 7.5m

GSD bought companies in the States when it was apparent UK competition was heating up but the Ephedra ban badly hurt them. Analyst notes say they over paid for the American nutrition companies.

GSD have recently changed the top management teams at the EU division in the hope of recharging top line growth.

The USA division on the top line looks knackered - alas GSD do not show the bottom line for each division.

 

[Simon Gordon]

DPH is a Small Cap. stock in the FTSE Pharma sector and is valued:

FORECAST - 06/05
T/O - 186m
PBT - 9.3m
EPS - 12.5
DPS - 5
P/E @ £2.43 = 19.1

FORECAST - 06/06
T/O - 210m
PBT - 10.6m
EPS - 14
DPS - 5.42
P/E @ £2.43 = 17.2

Market Cap. = 126m
Net Debt 12/04 = 13.2m

DPH has growth potential but this comparision highlights the value available in GSD.

 

[Simon Gordon]

If a company does settle with the NHS, which Ranbaxy have, it does not mean they - more specifically the directors - escape prosecution by the SFO.

So the key points facing GSD are:

- If GSD settle with the NHS they could take a small hit to the bottom line - no problem.

- If the SFO go ahead with a prosecution, which is looking more likely, the directors could face prison if found guilty. If GSD directors go to trial they would have to resign or more likely sell GSD.

With the SFO spinnning to the Times it has to mean they are going to go to trial.

So it is the SFO who will have more of a bearing on the destiny of GSD than the NHS.

Trial expected 2007 if a final decision to proceed is taken.

So how will profit accrue to a shareholder:

- New board of directors.

- CEO decides to sell GSD to private equity = 9 x EBITDA 17m plus 14m cash on balance sheet = 167m = £4.50. 10 x EBITDA = £5.00.

The major downside risk is that the CEO becomes indecisive if the SFO trial happens. I presume they have worked out strategies to handle the possible outcomes.

 

[Simon Gordon]

I have sold my shares as when I did my research I understood that if they settled with the NHS the SFO case would probably be dropped. This looks unlikely and so it becomes more like a coin-flip speculation -even though the value is tempting.

Good fortune!