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SNS Research Morning Note
InnoConcepts (Hold): EGM presentation shows leap of faith is required
The facts: Yesterday, a very confident and positive CEO presented InnoConcept's new strategy at the EGM. The EGM was meant to approve several matters including a change in the share capital and the remuneration of the new CEO, both of which were approved.
Our analysis: New CEO Niraj Mehra presented InnoConcept's new strategy. In short this entails that InnoConcepts will simplify the contract structures it uses, moving away from upfront lump sums and irrevocable minimum royalties to just hardware sales (the moulds) plus a mark-up. In addition, the company will no longer exchange licenses for stakes in clients and will move away from entering into contracts with end clients, solely focusing on specific converters in certain regions (which will become partners) with which it will target end-clients. The simplification of the sales process plus moving away from end-clients makes perfect sense but it does mean that InnoConcepts will start from zero again.
The new CEO has included ambitious mid-term targets of sales of between EUR 50-70m and an EBITDA of EUR 25m. In the mean time, the focus is on costs reductions (EUR 1m a year for the next three years) and the strengthening of the balance sheet. InnoConcepts mentions that this can be done by selling assets (WNA, Hoogerman or Proventec) or by issuing shares but the most likely option is a share issue. Given the net debt per June 2009 of approximately EUR 45m, a share issue should raise between EUR 15-20m (or more) in order to give InnoConcepts sufficient breathing space.
The two main issues that were put up for a vote were an increase in the share capital (which may be a further indication that a share issue is upcoming) and the new remuneration plan for the CEO. CEO Mehra will receive a fixed salary of EUR 120k and 300.000 shares (current value EUR 0.7m) annually. In addition, there will be a variable cash bonus (size unknown) and a variable bonus consisting of up to 600.000 options. All in all quite a package given the size of the company.
In addition, if CEO Mehra participates in a share issue for at least EUR 2m, InnoConcepts will grant the CEO options up to a value of 2.5 times the investment that CEO Mehra will make. If shares are issued at EUR 2 per share and the total share issue has a value of EUR 20m, the CEO will receive 2.5m options. That means that in year 1, he will have a potential stake in InnoConcepts of close to 9%. But if CEO Mehra turns around the company, he is worth that 9%.
We have a meeting scheduled with the CEO and the financial director next week and will update our estimates and recommendation after that meeting as the EGM did not allow for detailed questions to be asked.
Conclusion & Action: The new CEO has presented a new strategy that makes sense. There is a lot of enthusiasm and optimism but there is an awful lot of work to be done, both on the balance sheet side as well as on the commercial side that also requires a leap of faith in the new management team. But at least, the first signs are positive.
The update above was published in our Research Morning Notes for 09/09/2009 HTML and BOL