Fast-growing pharmaceuticals and services company Clinigen (LSE: CLIN) has an impressive five-year record of generally rising revenue, earnings and shareholder dividends. Yet the valuation looks attractive, at first glance.
With the share price close to 806p, the forward-looking earnings multiple for the trading year to June 2021 sits just above 10. That’s not too demanding considering the double-digit percentage growth rate in earnings that City analysts expect over the next couple of years.
Brisk expansion
The firm started in its present form just 10 years ago, and the pace of expansion has been brisk, driven by organic progress and an acquisition programme. One outcome is that the anticipated shareholder dividend is small, yielding just over 1%, but earnings should cover the payment around nine times.
I reckon it’s common for growing enterprises to reinvest cash flow rather than pay most of it to shareholders. However, the dividend has been growing fast, with a compound annual growth rate running at almost 17.
But some figures in today’s half-year results report don’t look too good, which may explain why the share price is weak. However, it’s normal for share prices to dip on results day with many companies, so the stock’s 5% decline so far this morning may be irrelevant.
Nevertheless, operating cash flow came in at just over £10m in the period, which is well down from the almost £35m achieved in the equivalent period a year ago.
The company said in the report the weakness in cash flow arose because an increase in working capital in the final months of the period was down to “the purchase and supply of Proleukin in the US.”
Other things affected working capital too, such as the timing of payments “particularly in the Africa and Asia Pacific region.” There were also delays in invoicing and cash collection caused by the launch of a new Enterprise Resource Planning (ERP) system.
The directors expect “these temporary movements” to reverse in the second half of the trading year. However, they reckon the working capital investment in Proleukin will remain at high levels because of the timing of shipments to customers towards the financial year-end.
Soaring debt
I’m cautious about all this because it’s quite common for fast-growing businesses to get into trouble with cash flow. One outcome of the increase in working capital so far with Clinigen is that net debt increased during the period by almost £70m, to a shade over £322m.
And the directors expect the figure to rise even more by the end of the trading year “as operational cash flow is offset by deferred consideration payments for CSM and Proleukin alongside capital expenditure.”
That £322m for net debt looks huge compared to that tiny £10m figure for operating cash flow, and it makes me nervous. Meanwhile, net revenue moved around 24% higher and adjusted earning per share shot up 34%.
There’s no denying the growth in the business, but I worry that a cash-crunch could be coming. However, I could easily be wrong about that.
But, just in case, I’m watching from the sidelines for the time being and will likely re-evaluate the share when the full-year results arrive later in the calendar year.