Mesoblast Limited

MSB Details

Trial Outcomes Presented: Mesoblast Limited (ASX: MSB) is involved in developing regenerative medicine products. The company has developed a regenerative medicine platform based on specialised cells known as mesenchymal lineage adult stem cells. 

• On 19 July 2021, MSB announced the trial outcomes presented to the International Society for Cell & Gene Therapy (ISCT) Scientific Signatures Series on Cell and Gene Therapies in Lung Diseases and Critical Illnesses on 17 July 2021.
• The company reported the trial outcomes from the 90-day study conducted on 222 patients for remestemcel-L (Rynocil), a lead candidate. The patients observed in the study are ventilator dependent and suffer from COVID-19 and moderate /severe ARDS (acute respiratory distress syndrome). The outcomes showed that two doses of Rynocil at days 3-5 provided durable survival gain through a minimum of 90 days to patients under 65.
• MSB findings showed that the use of Rynocil lowered the mortality by 48% at 90 days versus controls in a pre-defined analysis of 123 treated patients under 65 years old.
• MSB will meet the USFDA shortly to present the trial findings in the patients (under 65 years) administered in the trial and discuss the regulatory pathway for Rynocil.

Highlights of Q3FY21 (March 2021 Quarter):

• Dip in Revenue: MSB reported US$1.9 million of revenue from TEMCELL® royalties in Q3FY21 versus US$2.0 million in Q2FY21. The lower revenue was due to the temporary production shutdown mid-2020 to increase capacity and meet the growing product demand.
• Capital Raised: The company raised US$110 million capital via a private placement resulting in a cash balance of US$158.3 million as of 31 March 2021. The placement saw participation by SurgCenter Development, one of the leading operators of ambulatory surgical centres in the US.
• Modified Contract: MSB modified its contract with Hercules Capital, Inc. to increase the interest-specific period of the loan facility through to at least October 2021.

Total Revenue & Net Loss from FY16-FY20; (Analysis by Kalkine Group)

Key Risks:

• Regulatory Risk: The company faces changes in regulations and delays in seeking approvals for conducting clinical trials, manufacturing product candidates, and launching new markets.
• COVID-19 Uncertainties: MSB faces an uncertain market environment, limited hospital access and patients for operating trials successfully.

Outlook:

• MSB will also discuss a potential pathway for seeking clearance on the rexlemestrocel-L candidate in patients with chronic discogenic lower back pain and chronic heart failure based on the Phase 3 trial results.
• MSB will use the capital proceeds for advancing on the regulatory activities for the product candidates for SR-aGvHD (steroid-refractory acute graft versus host disease) in children, chronic lower back pain and heart failure. The funds will also be applied for building commercial inventory for Rynocil, manufacturing and expanding remestemcel-L and rexlemestrocel-L platforms, eyeing more market opportunities.
  

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of MSB gave a positive return of 2.73% in the past three months and a negative return of 18.96% in the past six months. The stock is currently trading lower than the 52-weeks’ average price level of $1.700 - $5.700. We have valued the stock using the Enterprise Value to Sales based illustrative relative valuation method and have arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at a slight premium than its peer average, considering the reduced morbidity observed in the trial results, and rise in cash balance.

For this purpose, we have taken peers like Clinuvel Pharmaceuticals Limited (ASX: CUV), Paradigm Biopharmaceuticals Limited (ASX: PAR), Kazia Therapeutics Limited (ASX: KZA). Considering the low trading levels, reduced mortality observed in the trial results in patients with COVID-19 ARDS, discussions slated for pathway approval from the USFDA on chronic discogenic lower back pain, and chronic heart failure, capital raised for increasing the operational and regulatory activities, and commercial expansion of product candidate platforms, and valuation, and associated risk of delay in regulatory clearances and availability of patients due to COVID-19 uncertainty, we give a ‘Speculative Buy’ rating on the stock at the current market price of $1.880, as on 29 July 2021 12.59 PM (GMT+10), Sydney, Eastern Australia.

MSB Daily Technical Chart, Data Source: REFINITIV  

Slater & Gordon Limited

SGH Details

Chair Stepped Down: Slater & Gordon Limited (ASX: SGH) is a legal services provider in Australia. SGH offers personal legal services, corporate and specialised litigation services, resolution of personal injury claims.

• SGH recently announced that Mr James MacKenzie, the current Chair of the company, will temporarily step down from the position from 1 August 2021 due to his medical condition. Meanwhile, Elana Rubin will serve as the interim Chair. Mr James will resume as the Chair in a few months as per the current assessment.

Highlights of 1HFY21 Results:

• Increase in Revenue: The company posted $98.29 million of revenue in 1HFY21, up by 10.7% YoY due to increased fees revenue and net movement in work in progress (WIP).
• Growth in Product Mix: SGH recorded an increase of 6% in active files and 16% growth in enquiries for the period. The company registered growth in the personal injury business (PIL) and advancement in its class actions portfolio.
• Rise in NPAT: SGH posted a rise in net profit after tax to $3.09 million in 1HFY21 versus a net loss of $561,000 in 1HFY20.
• Debt Repaid: SGH repaid $5 million to Super Senior Facility (“SSF) lenders. The interest coverage ratio improved to 3.5x in 1HFY21 from 4.2x in 2HFY20.
• Increase in EPS: The company reported an improved diluted EPS of 2.1 cents per share in 1HFY21 compared to negative EPS of 0.5 in 1HFY20.

 Revenue & Net Loss Trend from FY16-FY20; (Analysis by Kalkine Group)

Key Risks:

• COVID-19 Challenges: The company faced lockdown restrictions in Victoria for most of the 1HFY21. SGH also witnessed reduced activity in some parts of the legal process and lower settlement volumes due to the COVID-19 restrictions.
• Cost-Effective Funding: SGH faces the risk of seeking cost effective finance and renewing the finance facility at improved terms.

Outlook:

• SGH intends to reduce its gearing further over time. It plans to grow through service differentiation by training lawyers and brand campaigns and building scale digitally via Digital Management Solution.
• SGH has initiated a Group cost order regime in Victoria. SGH is implementing a disciplined control on the working capital management and keeping a strengthened balance sheet.
• SGH has created more roles in Civil practice groups, and Class Actions expanded the referral and partner program with Australian Family Law and looking to advance on other avenues.
  

Stock Recommendation: The stock of SGH gave a negative return of 11.76% in the past three months and a negative return of 17.68% in the past six months. The stock is currently trading lower than the 52-weeks’ average price level of $0.655 - $1.485. On a TTM basis, the stock of SGH is trading at an EV/Sales value multiple of 1.0x lower than the industry (Professional & Commercial Services) median of 3.0x, thus seems undervalued. Considering the current trading levels, increase in revenue and rise in NPAT in 1HFY21, growth of its services, and plans to lower debt and expand service portfolio, valuation on a TTM basis, and associated risks of COVID-19 in Victoria and of raising/refinancing funds, we give a ‘Speculative Buy’ rating on the stock at the current market price of $0.675 as on 29 July 2021.

SGH Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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