article is from 2019 but it also shares the same sentiment...

How do you identify currently loss-making companies that have the potential to be ten-baggers?

A ten-bagger is a stock that has a Return On Investment (ROI) of ten-fold or more. The term is also used to describe stocks with explosive growth prospects, since in general, a very high ROI must be supported by very high earnings growth. 

There is no doubt that as a first step, a lot of reading is required if you are to spot a potential ten-bagger. Not only do you need to read analyst reports and company announcements of the potential ten-bagger, but you also need to read all media coverage, as well as specialist media of the industry the company is in. You then need to do a SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis of the company, and whether you think the company is able to differentiate itself from competitors.

SGX Gateway recently published an article on Clearbridge (CH) in its  &ldquo 10 Questions in 10 Minutes with SGX-listed Companies&rdquo series. This article, with information provided by CH&rsquo s Management, explains very clearly the essence of CH&rsquo s business, and its strategy for growth as well as for creating shareholder value. The Company believes it is just starting to reach the point of take-off to sustainable growth.

In this article, we will use quantitative tools to look for fundamental indicators to support our hypothesis that CH may be a potential ten-bagger.

But first, let&rsquo s start with a few fundamentals on the business of CH.

What is Clearbridge all about?

CH&rsquo s business can be neatly summed up as: the creation of a platform for the delivery of affordable  Precision Medicine  (PM) to countries in the region such as the ASEAN countries, as well as Hong Kong and China.

What is Precision Medicine?

PM is medical care designed to maximise therapeutic benefit for individuals by using genetic and molecular profiling. It takes into account, individual differences in genes, environment, and lifestyle.   PM allows doctors to devise a targeted treatment taking into account each patient&rsquo s unique genetic profile and medical characteristics as obtained from analysis of the patient&rsquo s data.

The emergence of PM is due to advances in Artificial Intelligence (AI) technology, especially the new machine learning Deep Belief Neural Network and Convolutional Neural Network.

Readers might find our companion article on &ldquo A Comparison of AI for Precision Medicine and for Financial Markets&rdquo   useful.

And if you want to know more about PM and AI and have a glimpse of how CH does its PM, read  https://medicalfuturist.com/no-precision-medicine-without-artificial-intelligence. Here&rsquo s a quote from the article: &ldquo There is no Precision Medicine without Artificial Intelligence&rdquo . 

Clearbridge&rsquo s strategy and its three business  segments 

• Expand organically with clinics and medical centres spread throughout the region. Currently this segment has a footprint in Singapore, Malaysia, Hong Kong, and the Philippines. It also intends to acquire a majority stake in 9 Singapore dental clinics. This segment contributed 42% of FY18 revenue.
• Grow its healthcare systems segments (52% of FY18 revenue) which includes joint operations and contracts for diagnostic services and renal care services in public hospitals. In Indonesia it has 13 contracts for diagnostic laboratories, and offers renal care services in 37 public hospitals. Similarly, in Singapore and the Philippines it has partnerships with hospitals to provide pathology services, imaging diagnostics, dental, dialysis and renal care services.
• Invest in medical technology by the acquisition of stakes in companies with innovative and potentially disruptive, high-value medical technologies. This includes its 24.8% stake in Biolidics [Cell enrichment technology for application in cancer diagnostics and treatment] which was spun off on Catalist, and Clearbridge Photonics (High resolution imaging and therapy using photon beams. Photons are the basis of light and photonics is the science of detection, emission, transmission, and signal processing of photons).

The big picture on Precision Medicine

There is no doubt that in  the big picture, CH is in a high growth business, on the cutting edge of the healthcare industry. In the SGX Gateway  article, it was mentioned " Asia Pacific&rsquo s precision medicine market in 2018 was US$11.0 billion* and is anticipated to grow at a CAGR of 16.63% to hit US$20.9bn in 2023#  driven by a growing ageing population, increase in healthcare awareness and affluence levels, and increased adoption of digital healthcare."  

* Ken Research, &ldquo Rise in Ageing Population Followed By Need of Personal Care to Drive Precision Medicine Market in the Asia-Pacific Region&rdquo , 16 Jan 2019

#  Market Watch, &ldquo Precision Medicine Market is projected to grow (CAGR) of 16.63%, leading to a revenue of USD20.90 Bn by 2023&rdquo , 6 Nov 2018

So where to look  for potential ten-baggers which are currently loss-making?

• Ten-baggers are born, not made. As babies, their initial revenues are miniscule. So one way to look for signs that they have a high probability of growing into giants is to see if revenue growth is exponential.
• Baby ten-baggers&rsquo main problem is SCALE- the attainment of a certain size in revenue where economies of scale start to show, net margins turn positive, even as fixed costs increase at a much lower rate.
• For this to happen, gross profit margins (GPM) (revenue-direct cost of sales) must be high in the first place. And GPM can be high only if the product has high value-add such as if there is proprietary design and intellectual property in it.

Table 1: Clearbridge&rsquo s revenue growth and gross profit margins



Although we only have two full years of financials, which seems a rather shaky basis for identifying potential ten-baggers, we have to remember that those who scored ten-baggers were always the early birds which caught the worm.

The basis for your decision to invest must be first and foremost based on your analysis of the prospects for the business and the industry, before you even look at the potential ten-bagger&rsquo s current financials.

For Clearbridge, the revenue growth from 2017 ($288,000) to 2018 ($6,135,000) was a phenomenal 2030%! Despite this, the Gross Profit Margin also increased by 30.7 percentage points (47%-16.3%) This is a tell-tale indicator of economies of scale beginning to bear fruit, and of high-value-add and high productivity in CH&rsquo s business.

Will this run-up continue? Well, if we look at the Trailing Twelve Month March 2019 (TTM) numbers, it certainly seems so. Revenue for TTM was S$7,912,000, an increase of 28.9% while GPM remains relatively unchanged at 46%.

Looking at CH&rsquo s 1QFY2019 results, y-o-y (1Q Mar2019 vs 1Q Mar2018), revenue increased by 438% from S$377,000 to S$2,214,000. But losses attributable to shareholders dropped from S$1,790,000 to S$94,000, a 9,300% decline! This is yet another positive indicator of the scalability of its business.  

Conclusion

In general, extreme numbers are typical of potential ten-baggers. It is only when revenue, and earnings increase, or losses drop exponentially that share prices will be able to increase exponentially.  

Stanislaus Jude Chan  5/02/2020, 5:48pm

SINGAPORE (Feb 5): Emerging areas of precision medicine could transform loss-making healthcare group Clearbridge Health into a &ldquo potential unicorn in the making&rdquo , according to Tayrona Financial, the independent equity research house formerly known as NRA Capital.

&ldquo We see high growth potential for the company as doctors increasingly customise treatments to patients&rsquo genetic composition,&rdquo says analyst Liu Jinshu in a Jan 31 report. &ldquo With its network across Asia, Clearbridge is positioning itself to tap on this trend over the next five to ten years.&rdquo


According to Liu, such growing markets in precision medicine include direct-to-consumer DNA tests, drug sensitivity testing and cancer treatment.
Liu notes that Clearbridge has been growing its portfolio of healthcare facilities through acquisitions over the past two years.

Clearbridge now owns the largest chain of clinical laboratories and renal dialysis centres co-located in some of the best hospitals in Indonesia. In Singapore, the group has also acquired a medical-cum-aesthetic clinic and a chain of dental clinics.

Meanwhile, Clearbridge&rsquo s 24.8%-owned associate Biolidics has been making waves in China. This includes working with partners to develop clinical and laboratory tests using its patented technology to separate tumour cells from blood.

&ldquo Liquid biopsies can be used to detect cancer early and monitor disease and has been touted as a game changer in cancer treatment. In the US, similar companies have captured the attention of pharma giants and have been the subject of several acquisitions over the last two years,&rdquo Liu says.  For now, however, Clearbridge has been unable to climb out from the red.

For 9MFY2019 ended September 2019, the group posted a net loss of $8.2 million, down from a net loss of $16.2 million in the corresponding period a year ago.

9MFY2019 revenue more than trebled to $13.2 million, from $3.9 million a year ago, on the back of strong contributions from its recent healthcare acquisitions.

&ldquo With a stream of profitable acquisitions, we expect Clearbridge to turn EBITDA positive in 2020 and report its maiden profit in 2021,&rdquo Liu says. He notes that the company&rsquo s management has a track record of running and monetising medical technology businesses.

Nonetheless, Liu is not too worried about Clearbidge&rsquo s ability to turn a profit. After all, he argues, other loss-making precision medicine companies have managed to successfully attract attention for their technologies and market presence. For example, Liu points out that Foundation Medicine was acquired by Roche for US$2.4 billion ($3.3 billion), and that Guardant Health has a market capitalisation of US$7.42 billion.

&ldquo We believe that Clearbridge deserves an aggressive valuation for its high future growth potential. Hence, we value Clearbridge at US$201.3 million,&rdquo Liu says. This translates to a fair value estimate of 41 cents &ndash representing a potential upside of 195% from Clearbridge&rsquo s closing price of 13.9 cents on Wednesday

The research house has an &ldquo overweight&rdquo rating on the counter.