Investor Forum – Feb ’23

Feb 28, 2023 | 9:49 GMT

Lewis Dalgliesh

Thank you to Josh Mostyn, Director at SWIM Capital, and Robin Maxwell, Founder of Farnham Capital for presenting their favourite public investment ideas of the day.

A summary of the February Investor Forum follows and both members have kindly provided their presentations from the day, which are attached.


Josh Mostyn – Plant Health Care (PHC)

  • Sustainable, disease fighting and yield boosting technology with no negative externalities.
  • Well protected IP with 18 issued patents and 50 pending applications in 11 countries and the European Patent Office.
  • Demonstrable 14x ROI in sugarcane and 5% increase in US corn yields.
  • In other industries, Plant Health Care, would be experiencing much faster adoption.

For a succinct explainer with management, we’d recommend this ‘Five Minute Pitch TV’ video.

Why Do You Care?
Plant Health Care has developed a unique and patented approach of fighting disease and boosting crop yields, best thought of as “vaccines for plants.”

Rather than a reactionary treatment, PHC offer a preventative and premediated plant health service. The company, therefore, sits in the crossover of two of the club’s core themes…

  • Preventative Healthcare => think Babylon Holdings, Echelon Health and our upcoming “The Future of Preventative Healthcare” conference, and
  • The Agrarian Revolution => think Deere & Co., AppHarvest and precision farming

SUMMARY

Products
There are two core business lines…

  1. Harpin (70% gross margin) – a recombinant bio-stimulant protein which promotes the yield and quality of crops.
  2. PREtec (81% gross margin) – the result of recent R&D, PREtec peptides create a complex defence mechanism in plants.

Rather than sitting in the soil, PREtec goes into the plant and finds which peptides (short amino acids) will stimulate it. Harpin, derived from bacteria and funghi, is explained in this Ombudsman factsheet.

“Harpin αβ does not act directly on disease organisms, nor does it permanently alter the DNA of treated plants. Instead, Harpin αβ activates a natural defense mechanism in plants, referred to as systemic acquired resistance (SAR).”

Differentiation
Unlike other companies that offer plant immune proteins, PHC is next to unique in that Harpin and PREtec offer no drag on crop yield. The latter, in particular, is a cutting-edge technology, deliverable as a liquid or granule that leaves no harmful residues on the crop or environment. A key difference in PHCs approach is that the product sits with the plant itself, not in the soil.

Distribution
Headquartered in Carolina with a laboratory in Seattle – the PHC products are white-labelled for many of the company’s clients via a partnership agreement. PHC is commercial in the US, Mexico, Brazil, Chile, much of Europe and South Africa. The addressable market is $4-5bn, and currently compounds at 16%.

Slow Adoption
According to Josh, PHCs customers are slow adopters because the farmers themselves are unable to risk 100% of their crop with a new technology – their crop, after all, is their livelihood.

However, it’s believed that proof of concept is slowly taking place on the ground, and where farmers currently trial the products (for themselves) over one or two hectares, in a number of years they’ll use it on the vast majority, if not all of their crops. In that way, the customer base is growing both in terms of contract number and contract size.

Trust
Josh explained that the market lost trust in PHC due to a £4.6mn raise in Mar-2020 which was supposed to take the company cash flow positive, but instead a further raise took place in 2021. He expects the company to be cash flow breakeven later this year or in FY24.

Valuation
The company is targeting £30mn revenues by 2025 (vs $11.7mn currently). According to Josh, the asset-light B2B business model and white-label distribution is highly scalable and long term a 20% PBT margin is reasonable.

Given the growth potential, Josh claims he wouldn’t sell his holding in 2025 if it were trading on 20x earnings. At the 20% margin, this forecasts a 2025 market-cap of £120mn (versus £40mn today).

Robin Maxwell – Fielmann (FIE)

  • Myopia (short-sightedness) is growing 7.5% annually to 2028.
  • Prevalence increasing due to screen-time and urban living trends.
  • The human eye is elongating due to our collective and incessant screen time.
  • Fielmann decoupled from EssilorLuxoticca and offers an interesting sector value entry.

Why Do You Care?
To understand the direction of travel, in the highly urbanised population of Singapore, 80% of the population wear glasses.

Globally, 34% of the world today suffers from myopia, but a forecast 48% will by 2050. This is a growing global problem that offers an opportunity for a buy-and-hold perpetuity style investment in a sector with likely growing dividends.

SUMMARY

Sector

  • EssilorLuxotica – market leader following Essilor and Luxotica merged in 2018 (EUR 75bn, 30x earnings).
  • Fielmann – “Fashionable eyewear at fair prices” (EUR 3bn, 25x earnings).
  • Safilo – Italian market leader (EUR 600mn market cap, 15x earnings).
  • Hoya – Japanese market leader. (EUR 34bn market cap, 28x earnings).
  • National Vision – US major player (EUR 2.9bn, 50x earnings).

Market
Fielmann sell one in every two glasses in Germany and traded in line with the market for 20 years but decoupled from the wider market above when Essilor and Luxotica merged in 2018, to earn themselves a substantial European market share.

The rerating is largely due to the internationalistion strategy as the company has bought into Italy and Spain, and furthermore, has direct exposure into Ukraine which has impacted investor sentiment.

The company itself is run by Mark Fielmann and founded by his father Günther in the early 70s, Fielmann is still a 70% family-owned business.

Headwinds
The two obvious headwinds for Fielmann are…

  1. Online opticians and sellers
  2. Corrective surgery

When queried about the two of these, Robin defended the investment-case on the first because online eye tests are subpar, and that most people choose to get their eyes tested in-person with a known and trusted name. And on the second, he explained that only people of a certain age tend to be interested in LASIK surgery and it’s not material to the investment case. For more on this last point, in Europe, the total LASIK surgeries has dropped from over 1mn a year in 2007 to around 750k per year today.

“Fielmann is deeply rooted in the optical industry and is active at every level of the value chain. We are a designer, manufacturer, wholesaler and optician.”

Special Dividend
In recognition of its 50th year, the company paid a special dividend in 2022, so please be aware that the stated trailing 12-month dividend yields are currently skewed and this year dividends will fall back in line with 2021.

Asia
We ran out of time on the day, but it was asked at the end whether the company has exposure to Asia. A review of the 2021 financials shows revenue exposure by geography as follows… Germany (72.9%), Switzerland (11.1%), Spain (6.7%), Austria (4.9%), Other (4.4%).

Strategy
As Robin explained, the retail experience is crucial, where prescriptions are written whilst in store. The current D2C growth is coming at the expense of margin and cash flow, with the Italian market still lossmaking.

The company has had a hard run of it recently and the shares have been hurt. But he believes much of the bad news is behind it, and unless you get corrective surgery, this is a deferred purchase in perpetuity – so a significant portion of the company’s revenue is effectively recurring, even if not booked as such.