30/06/2008
Bringing together a band of businesses in a busy, acquisitive 2007, former cash shell Concateno, whose name is derived from the Latin for ‘to link or bind together’, has quickly transformed itself into Europe’s largest and most experienced drug and alcohol testing services provider.
With its acquisitive phase complete, the company is now well under way with the successful integration of last year’s acquisitions, of which the largest was rival AIM group Cozart, a specialist in ‘point-of-care’ testing acquired for £65.5 million cash in October.
European number one in a defensive market, characterised by high entry barriers, growth and margins, Concateno promises organic growth aplenty. Its experienced management is now looking to expand the business geographically and to exploit cross-selling opportunities across a large and diverse roster of clients, typically providing visible levels of repeat business. Adding to its investment attractions is the ongoing development and exploitation of new technologies, which can help clients address society’s drug and alcohol abuse problems.
Results for 2007 were encouraging, and with analysts forecasting rapid growth, the shares, trading on modest multiples, look terrific value. Moreover, having swiftly transformed itself into a market leader, one could expect strategic bidders to come calling at some point in the future.
Strategy
Concateno was originally floated on AIM in April 2005 as a vehicle for water industry guru Keith Tozzi to buy businesses in the regulated water sector. However, when his plans in this market were thwarted, the brief was changed, with shareholders’ blessing, and in 2006 Concateno made its first acquisition – paying £30 million for Medscreen in a deal that brought in chief executive Fiona Begley – in the fast-developing and fragmented drug-testing market.
Last year was a pivotal one, with the acquisition of six ‘drugs of abuse’ testing businesses – among them TrichoTech, CPL, Euromed and Cozart – turning Concateno into Europe’s largest and most experienced player in drug testing products and services. There is much growth to go for in this market, which, according to Tozzi, ‘is huge and fragmented and still in its embryonic stages’.
2007’s highest-profile acquisition was Cozart, focused on point-of-care testing and giving the group scale as well as a better balance between laboratory-based and point-of-care testing. Cozart brought with it a laboratory products division as well as the ability to manufacture drug-testing devices in house. This will benefit margins, while also accelerating Concateno’s stated strategy of European expansion.
By linking all these businesses and their respective technologies together, Concateno now offers a unique service akin to a one-stop shop to 8,000 or so clients. ‘We are a niche business in an attractive market, with high growth rates and high margins,’ enthuses Tozzi, who says the company carries out eight million drug tests annually and has a global network of 500 sample collectors.
Testing takes place at three state-of-the-art drug-testing laboratories, which are accredited by testing body UKAS (the United Kingdom Accreditation Service) and are able to test urine and oral fluid samples, as well as hair, an indicator of longer-term drug and alcohol misuse. ‘We are accredited up to the eyeballs,’ assures Tozzi, highlighting one of several high entry barriers competitors must overcome.
Current activities include the testing of employees, testing in order to support the judicial system and testing workers who might be under the influence in safety-critical sectors such as transport, international maritime and offshore. Hair testing supports family law and child protection efforts, as well as forensic investigations. Meanwhile, the client base is exceptionally diverse, ranging from the police and the prison service to Esso, Rolls-Royce and a host of major shipping companies, with many clients tied into three- and five-year contracts. ‘We have very little customer churn,’ insists Tozzi, ‘and we have good visibility of earnings.’
Having proceeded through its acquisitive phase, the management team, led by Tozzi and Begley, has made swift work of the integration and rationalisation of bought businesses, a process that will enhance margins through scale benefits and synergies.
Geographic expansion and cross-selling are key strategic planks from here on in, with Concateno looking to leverage its laboratory testing capabilities and point-of-care equipment across its existing clients, while growing in key markets such as the UK, Australia and Scandinavia.
Management
Affable chairman Keith Tozzi, a well-known figure in the water sector, brings his formidable business-building experience to bear at Concateno. Between 1992 and 1996, he was one of three executive directors of Southern Water, where he successfully delivered a £300 million investment programme.
From 1996 to 2000, Tozzi was chief executive of the British Standards Institution, where he oversaw growth in turnover to more than £200 million and the acquisition of businesses in the UK, South America and Eastern Europe. More recently, between 2000 and 2003, he was chief executive of Swan Group, the owner of Mid Kent Water.
Irish biochemistry and business graduate Fiona Begley is Concateno’s energetic chief executive. Having held management positions at both Syva UK and Behring Diagnostics UK, she joined Medscreen (the first business acquired by Concateno) in 1996 as sales and marketing manager. Subsequently appointed managing director of the business in 2000, Begley led a management buy-out of the company from PharmChem in 2002.
Overseeing the numbers is finance director Neil Elton, who brings with him considerable experience of acquisitions and integration, having previously served as finance director at deal-hungry European newspaper publisher Mecom. Prior to that, he was group finance manager at international PR group Huntsworth.
Investors can also take a good deal of encouragement from the credentials of the non-executive team, which includes James Corsellis – a mover and shaker at shareholder Marwyn and previously chief executive of dot-com star icollector – and the enthusiastic Vin Murria, who has more than 20 years’ experience in the venture capital and private equity fields and created shareholder value aplenty during her stint as chief executive of Computer Software Group. Also on board is scientist Dr Chris Hand, who was chief executive of Cozart before its acquisition by Concateno.
Prospects
On target to hit this year’s numbers, current trading gives cause for optimism. Although parts of the public sector drug-testing market present some short-term challenges, overall, demand for Concateno’s services remains robust, with growth rates ‘particularly strong’in the workplace and legal sectors.
Long-term prospects are underpinned by new technologies and applications in development, with recent highlights including the launch of blood-borne virus testing for HIV and hepatitis, as well as accreditation of the group’s Cardiff site to test hair for signs of chronic long-term alcoholism and date-rape drug GHB. Testing for the commonly used prison drug buprenorphine for the prison service has also begun.
In a revolutionary development in point-of-care testing, Concateno is developing a next-generation handheld testing device via a 50/50 joint venture with European electronics giant Philips. Branded ‘Cozart-Philips’ and set for launch in 2009, this device, aimed at the roadside testing and workplace markets, can uniquely test oral fluids for up to eight drugs within a minute and is up to 100 times more sensitive and accurate than any other point-of-care analyser in the market. Currently undergoing trials with European police forces, it could provide a strong area of growth for the group further down the track, depending on the rate of take-up, and the early signs are encouraging.
In terms of the financials, last year’s results were clouded by the sheer number of acquisitions completed in 2007. However, for a meaningful picture of progress, one need only look at the pro forma figures (assuming all group businesses were owned for the entire period), which demonstrated 12 per cent turnover growth to £41.8 million (2006: £37.4 million) and a 63 per cent increase in adjusted EBITDA from £4.9 million to £8 million. Year-end net debt of £27.1 million reflected recent takeover activity, yet, given the group’s cash-generative characteristics and synergies and savings to come, particularly from the Cozart deal, this should not unduly concern investors.
Concateno is forecast to deliver some aggressive growth over the coming years. For 2008, Kaupthing Singer & Friedlander’s Kean Marden sees profits rising to £10 million pre-tax from turnover of more than £56 million, with earnings burgeoning by 46 per cent to 10.5p per share. For 2009, he forecasts further profits progression to £14.5 million from revenues approaching £65 million, with earnings likely to come in at 12.8p. With much growth to go for at this stage, it is unsurprising that no dividend payments are forecast for the foreseeable future.
Valuation
Based on forecasts in the market, Concateno trades on a prospective multiple of 13 times, falling to 10.7 times for 2009. That rating looks anything but testing, given this year’s anticipated earnings advance and theEPS growth of 22 per cent pencilled in for next year.
On a PEG (price/earnings to growth) basis, ratios of 0.3 and 0.49 suggest the shares represent very good value indeed for investors, with the relatively lowly rating perhaps reflecting the lack of a like-for-like peer quoted on the London market. However, it is worth pointing out that Concateno trades at a discount to the more highly rated diagnostic technology sector.
Significantly, from a strategic point of view, there are three large US players in this market, namely First Advantage, Quest Diagnostics and Inverness Medical Innovations, all with stated ambitions to move into the European market. In order to mount any sort of bid for such a strategically well-placed concern as Concateno, a premium price would have to be offered.
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| AIM | £87.91m |
92.00p
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-1.00p
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| 30/06/2008 |
| 10/05/2005 |
