Needless to say I hold this share, therefore DYOR because I am probably very biased. This is my interpretation only of company information available in the public domain, forecasts and supporting documentation from the company website and broker information. It is not an invitation to buy shares in the company but an analysis carried out for my own benefit and made available through these boards for interest only.

I’ve only recently come across this stock having seen a comment that it is the “lowest risk growth stock around”. Now for somebody who believes at the moment that Hornby deserves that title, and from somebody who believes that Ben Bailey is cheap, growing and relatively low-risk after the upbeat reports from the company and in the building industry as a whole, that comment merited further investigation. The graph looks most encouraging with a good upward trend emerging the base of which appears to be at 160p. RSI is currently overbought and there may be a pullback. However, the technicals are excellent but only supportive in my opinion to whatever the fundamentals can tell us.

Lawrence (LAC) trade on AIM and, to my mind, this already gives the share a slight disadvantage. Liquidity of shares is a big issue with some small stocks, and although not a big player, I do like to be able to buy as much I want and sell when I want. The shares are tightly held by the family although their stranglehold has been reduced recently to about 47% and institutions have got aboard. Closer inspection does, however, reveal a share that seems grossly over-looked and apparently under-valued on future prospects. No comment on iii by any poster for about six months and then only two in the last year, and even then only seven in all. Same story on ADVFN - well actually none at all. Unloved, unwanted and maybe unwarranted.

The contrarian in me went to work, although the first discovery made was that Lawrence is maybe not quite as unloved as first thought with Investors Chronicle taking quite an interest in its prospects, tipping it as recently as Feb 7th and before that in December. It comments that one of its bull points is “potential for massive growth at Eco”.

Lawrence is a player in the pet products supplies market. The big plus here is that, although it owns a subsidiary, Interpret, which has market presence in both UK and US for the manufacture and distribution of aquariums and book facilities. The acquisition of Ringpress Publishing last year added to its value and it is expected that the whole business will be demerged for about 60p per share in the summer. This in turn will release finance for Lawrence to go ahead and acquire the 50% it does not own of subsidiary, Eco Animal Health with any excess being returned to shareholders. Lawrence has also addressed the subject of illiquidity (as mentioned above) recently with a placing and bonus issue which has led to three times as many shares being on the market., apparently with little effect on the share price. Charles Stanley’s note last February was at a price of 355p which adjusts to about 118p, so there appears to have been a 40% rise in the last year. Their forecast of 540p (adjusted to 180p) by summer 2003 will not be far out it appears.

Agil is the “Green” aspect of the business exploring commercial avenues in producing natural ingredients for animal digestion and feeds. This is not a great profit churner with profits this year expected to be about 1.1m.

Eco is the exciting, growth area of Lawrence. On the face of it, it appears to have similarities with Dechra Pharmaceuticals which is still being hit by the uncertainty from an investigation into the supply of prescription-only veterinary medicines. Only two years ago it was trading at over 200p and commanding a forward PE over 20. Now trading at 57p on a PE of 5 it looks good value itself but for the big shadow of the investigation. Eco, appears to have none of these problems and left with this part of the business, Lawrence will own a business with licences for two drugs. Ecomectin is an ant-parasite drug which is receiving approval in both Europe and US and is expected to generate sales of 35m in the next three years. It already has a 30% market share in Ireland. Aivlosin is a respiratory drug “set to receive the commercial green light” in the next six to twelve months and forecast to make sales of 105m in the next three years assuming a 30% market share elsewhere. These figures are impressive enough for any growth company but Lawrence only has a market cap. of 42m of which Interpret is worth, by my reckoning 15m. What is more impressive is that because of patents held on the two drugs margins could be as much as 70%…..which bring us to the calculations.

In three years time, sales from the two products are expected to be in the region of 140m. With high margins, although not all will be as high as 70% it would be reasonable to assume margins of between 40% and 50% as the acceptable norm. Constrains and processes in the EU and US are tough and, consequently, higher margins tend to be forthcoming. Assuming a slightly lower market share than brokers Charles Stanley, and giving Agil only 7m profits in three years time, therefore assuming below average growth only, the equation for 2006-2007 becomes one of 72m sales on Aivlosin and with the company expecting 35m of sales on Ecomectin (although comparisons with a drug called Ivomec which has sales of over $1bn suggests this could be conservative the total sales) a total of 114m.

There are obviously other issues but they appear minor in my opinion and I have assumed that the acquisition of the other 50% Eco Animal Health will be offset by the demerger of Interpret and costs etc. will all be covered. No assumption of any cash being returned to shareholders is being assumed either – the valuation I have calculated will be for the “new” Lawrence only.

Assuming a conservative 25% profit margins on sales of 114m we arrive at a figure of 28.5m. By allowing 30% for deductions, tax etc. we get 20m profits which equates to an EPS of about 77.6p (40% margins suggest about 124p!) based on 25.76m shares in circulation according to Sharescope. If we increase the deductions to 40% which might allow for any other costs etc. an EPS of 66p is possible.

The forward PE for 2004 is 10 with a yield of over 3% which looks cheap even now without any premium for the anticipated accelerated growth of the next couple of years. The company is cash-generative and also has no debt and brokers Charles Stanley and Durlacher agree on the potential with the former expecting “explosive” growth from here. If that growth accelerates at anything like the forecasts above (and given the fact that my calculations could be wrong, which is quite likely) a PE of between 10 and 15 would appear to render a lot of upside in the share price. I shall settle for 66p EPS and PE of 12 to give a target for 2007 of 800p although I do quite like the idea of EPS 124p at a PE of 15! Durlacher have a price target of 700p if Aivlosin is a blockbuster drug which they think it could be.

A lot can go wrong in the Health and Pharmaceuticals sector where a premium is paid for licences and patents on products. Any delays in the two primary products of the company would hit growth prospects hard. The patents on products can also be short-lived and challenged so there are added risks involved in such an investment. By 2007 new products and/or patents will be required to keep the company going forward. On the other hand Agil will benefit from new legislation in the US and Europe which bans the routine use of antibiotics in feeds and I assume that this will give Agil’s products a boost.

I am not sure if I agree with the “lowest risk growth stock” label but I can see a lot of upside potential with limited downside from here. That is the reason my price forecast of 8 errs on the conservative side of my estimates. Nonetheless that is nearly a fivefold price increase from today’s price and if Agil benefits greatly from legislation and the two drugs become blockbusters with more in the pipeline, and Interpret’s worth as a single entity is more than calculated, who knows what the company could be worth in four or five years time.

www.agil.com
www.ecoanimalhealth.com
http://www.lawrenceplc.com/
http://www.nothing-ventured.com/view/panel/viewtip.asp?ArticleID=814393

hiya
anybody any info on reverse takeover announced this morning?
cheers.