Twist IPO: It Seems Undervalued, And Shareholders Are Buying

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About: Twist Bioscience Corporation (TWST)
by: Bilbao Asset Management
Summary

Twist Bioscience Corporation produces synthetic DNA for clients in the biotechnology industry.

The global market opportunity could reach $38.7 billion in 2020, showing a CAGR of 44.2% from 2014 to 2020.

In 2017, TWIST grew revenues to $10.76 million, showing growth of 374% y/y.

TWIST noted that it will use the proceeds from the IPO to develop the company’s technologies, and a certain amount to increase the sales and marketing capabilities among other uses.

Selling shares at 7.71x forward sales, TWIST seems a bit undervalued. Other companies operating in the same sector trade at much higher valuations.

With revenues growing at 374% y/y, Twist Bioscience Corporation (NASDAQ:TWST) seems to be selling shares at an undervalued level. The shares are priced at 7.71x forward sales with other competitors trading at more than 16x sales. Additionally, certain shareholders showed interest in acquiring stock worth $30 million at the IPO price. It seems that they believe that $15 per share is an opportunity. With that, investors should monitor the CFO in the near future. The company seems to be burning cash very fast.

Source: Prospectus

The investment banks helping the company launch the IPO are very large. It is a very beneficial feature, so the company should retain the interest of many investors:

Source: Prospectus

Business

Founded in 2013 and headquartered in San Francisco, Twist Bioscience Corporation produces synthetic DNA for clients in the biotechnology industry. Combined with a disruptive method to produce synthetic DNA by “writing” DNA on a silicon chip, the company has utilized a proprietary software that permits high levels of quality, precision, and automation at low cost.

Source: Prospectus

The number of applications of the new technology is high. The company can manufacture synthetic genes, tools for next generation sample preparation, and antibody libraries for drug discovery and development. In addition, TWIST is researching new models to create new biologic drugs, and applications for synthetic DNA, like digital data storage.

The products seem to be appreciated by a large number of clients. According to the prospectus, TWIST provides products to over 600 clients. The lines below provide details on different industries, which showed interest in the products developed by TWIST. Note that the pharmaceutical industry is not the only one:

Source: Prospectus

The Market Opportunity Seems Large

In 2017, the total market for synthetic biology products was said to be equal to $4.4 billion. The company believes that it could increase up to $13.9 billion by calendar year 2022.

Other experts like Allied Market Research are even more positive about the future growth of this industry. The global market opportunity could reach $38.7 billion in 2020, showing a CAGR of 44.2% from 2014 to 2020. The company, which seems well positioned to benefit from this beneficial upward trend, should receive more revenues as the industry evolves.

Balance Sheet

With an asset/liability ratio of 4.4x, the financial shape of TWIST seems stable. The company also has a large amount of cash in hand, equal to $31.22 million on September 30, 2017, which represents 36% of the total amount of assets. Additionally, TWIST shows short-term investments of $30.9 million and total current assets of $67.86 million. The amount of liquidity is quite abundant. It will help the company finance its future developments:

Source: Prospectus

The total amount of liabilities is equal to $19.38 million. It does not seem large and worrying. Additionally, the long-term debt does not seem significant. As of September 30, 2017, it was equal to $9.15 million. The image below shows the list of liabilities.

Source: Prospectus

The table of contractual obligations should not worry investors. As of June 30, 2018, the total amount of contractual obligations was equal to $40.3 million. The company will have to make payments of $0.743 million in less than a year, $13.49 million in one to three years among other future payments. As of today, the company seems to have cash in hand and short-term investments to pay all the contractual obligations. Investors should not be concerned about this matter. The image below provides additional details:

Source: Prospectus

374% y/y Revenue Growth But Declining CFO

The revenue growth is what investors will appreciate the most. In 2017, TWIST grew revenues to $10.76 million, showing growth of 374% y/y. With that, the operating expenses, equal to $69.24 million in 2017, are too large. The company reported negative net income in both 2016 and 2017, equal to $44.08 million and $59.31 million respectively.

Growth investors should not care about the losses if the company keeps growing revenues at the same pace. The market will review the revenue growth very closely. If revenues keep growing, the stock price should creep up. The image below provides the list of assets:

Source: Prospectus

TWIST may not be appreciated by value investors. The company’s operating results form part of the first detrimental reason. In addition, it is not beneficial that CFO was negative in 2016 and 2017, equal to -$38.59 million and -$51.30 million respectively. The image below shows the cash flow statement:

Source: Prospectus

Use Of Proceeds

TWIST noted that it will use the proceeds from the IPO to develop the company’s technologies, and a certain amount to increase the sales and marketing capabilities among other uses. The lines below provide further details:

Source: Prospectus

The company is burning cash at a fast pace, which is perhaps the most relevant caveat on this name. Investors will need to review closely the amount of cash in hand. If the company needs more cash, it could raise capital, which could lead to share price depreciation. With this in mind, now check the following lines. The company expects to have cash for at least the next 12 months:

“After giving effect to the anticipated net proceeds from this offering, we expect that our existing cash, cash equivalents and short-term investments will be sufficient to fund our planned operating expenses, capital expenditure requirements and debt service payments through at least the next 12 months.” Source: Prospectus

Capitalization

With 26.609 million shares outstanding after the IPO at $15, the expected market capitalization could be equal to $399 million. Deducting $160.7 million expected after the IPO and adding debt of $9.53 million, the enterprise value should be equal to $247 million. The image below shows the expected capitalization after the IPO. Note that the convertible preferred stock is expected to be converted as the IPO goes live, which seems very beneficial. Keep in mind that stock dilution from these convertible securities will not exist.

Source: Prospectus

Assuming revenue growth of 200%, which seems reasonable after growth of 374% y/y, forward revenue should be $32 million. With this figure in mind, the EV/Forward Revenues is 7.71x.

The company has many competitors. The following are some of the names as mentioned in the prospectus. Many of them are private companies or owned by large groups.

  • GenScript Biotech Corporation (OTC:GNNSF)

  • GENEWIZ, Inc.

  • Integrated DNA Technologies, Inc.

  • DNA 2.0 Inc.

  • Eurofins (OTCPK:ERFSF)

  • Promega Corporation

  • OriGene Technologies, Inc.

  • Blue Heron Biotech, LLC

  • Illumina, Inc. (ILMN)

  • Integrated DNA Technologies, Inc.

  • LakePharma, Inc.

  • Aldevron, LLC

  • Adimab, LLC

  • Catalog Technologies, Inc.

  • ETH Zurich

  • Helixworks Technologies Limited

  • Iridia, Inc.

  • North Shore Bio

  • Roswell Biotechnologies

Taking into account the valuation of the competitors of TWIST, the company could trade higher. GNNSF, with an enterprise value of $4.39 billion, gross profit margin of 70.48% and revenue growth of 61.29%, trades at 21.81x sales. Illumina, Inc. (ILMN), with an enterprise value of $53 billion, gross profit margin of 70.31% and revenue growth of 25.05%, trades at 16.52x sales. TWIST is not as large as ILMN and does not have gross profit margin like that of GNNSF. However, taking into account that they operate in the same industry, 7.71x seems too small for TWIST.

Previous Shareholders May Acquire $30 million At the IPO Price

It is very beneficial that certain shareholders showed interest in acquiring stock worth $30 million at the IPO price. It shows that shareholders believe that the price is attractive. The lines below provide further details on this matter:

Source: Prospectus

Shareholders

The amount of institutional investors is large on this name, which seems very beneficial. ILMN and Fidelity, for instance, are shareholders. It is also very relevant that none of the shareholders control more than 50% of the total amount of shares outstanding. This means that the company should have an independent Board of Directors. The image below shows the list of shareholders:

Source: Prospectus

Conclusion

Selling shares at 7.71x forward sales, TWIST seems a bit undervalued. Other companies operating in the same sector trade at much higher valuations. They are larger and have better gross profit margins, but their revenues don’t grow at the pace similar to that of TWIST. With this in mind, TWIST could easily trade higher than 7.71x forward sales.

In addition, the fact that previous shareholders showed interest in acquiring shares is also very beneficial. Investors should study the CFO in the future quarterly reports closely. TWIST is burning cash very fast, which may not be appreciated by certain investors. With that, the company seems a buy at $15 per share.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.