Bioquell (LSE: BQE) announced today that it was looking for partners — inevitably, the stock rose more than 8% on the day, after an already impressive rally (+45%) so far this year.
If you are invested in it, though, you may well wonder whether it is time to cash in and invest proceeds into GlaxoSmithKline (LSE: GSK), whose stock is down almost 14% since its 52-week high in April.
Action At Bioquell
The sale of Bioquell’s testing unit TRaC Global for £44.5m earlier this year “represented a substantial premium to the then market capitalisation of the whole of Bioquell,” the group said on Monday, adding that the disposal unlocked substantial value for shareholders and also significantly simplified its corporate structure.
Bioquell’s current market cap stands at £58m, which almost doubles the value of its revenues, yielding a forward net earnings multiple of 17x — based on the assumption that Bioquell would return to the black this year after small losses were reported in 2014. Trading multiples tell only one part of the story at Bioquell, of course.
Downside Vs Upside
Given the simplified structure, “increasing investor interest in the bio-pharmaceutical sector” and “heightened concerns of governments” around the world “in relation to antibiotic resistance“, the board of Bioquell has decided to carry out a strategic review of the group’s remaining biological contamination control business (60% of the group’s revenues) that may or may not lead to a combination with a larger partner.
“If the conclusion of the strategic review is to remain an independent business, the board’s intention is still to return a majority of the proceeds from the disposal of TRaC to Bioquell shareholders,” the group also added. Based on this information, upside appears to be very limited at 147p a share — where Bioquell currently trades.
If I chose against investing in Bioquell, then, would I be wise to make a move for Glaxo instead?
Glaxo: Lots Of Talk, Little Action
As you might know, there are two big problems with Glaxo: firstly, its management team hasn’t lived up to expectations in recent times, I’d argue. Secondly, there has not been any meaningful update on its break-up, rumours of which have made the rounds for months and have been fuelled by bankers close to Glaxo and Glaxo managers themselves.
Still, I do not dislike Glaxo at 1,425p a share, where it currently trades.
The stock offers little growth but a decent yield, given that Glaxo is expected to grow revenues and core profits just above inflation for a few years from now — yet its appealing forward yield above 5% could make up for little capital appreciation.
So, one key question is just how safe is the dividend of an investment that looks a lot like a fully priced bond.
Glaxo’s financials are sound, its balance sheet and income statement show, but the cash flow statements point to the possibility that Glaxo may need to raise more debt to finance its dividend if projections for 2015 earnings aren’t met.
That's an unlikely outcome to predict, however, based on reasonable earnings estimates. So, I'd retain exposure to Glaxo, although hefty capital gains in the pharmaceutical space could be achieved by betting on a top-quality stock that promises much higher returns than those of Bioquell and Glaxo.
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Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK has recommended GlaxoSmithKline. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.