Friday, June 30, 2017

Cyanotech Potentially Worth $20 per Share


Meridian explained in one of its first Schedule 13D filings why Cyanotech is worth the effort: 

"Astaxanthin is a new supplement category.  It is a natural and highly-effective antioxidant and anti-inflammatory with benefits that Meridian believes will attract consumers from across the retail spectrum, from serious athletes seeking help in recovering from extreme physical exertions to seniors looking for relief from chronic inflammation related to arthritis.  Awareness and demand for astaxanthin exploded in 2012 prompting a world-wide rush of companies seeking to increase supply and win market share.  Cyanotech won the contest for market share – almost certainly due to its good fortune of having recently put in place a management team experienced in retail supplements and new product introductions.  Meridian believes Cyanotech's BioAstin Hawaiian Astaxanthin® brand has the potential to be the category-identifying brand (e.g., like Kleenex® is to facial tissue and Xerox® is to copy machines.

As awareness and demand for astaxanthin grows, Cyanotech'sproducts are well-positioned to retain their current outsized market share allocation.  The Company's strong and friendly relationship with Costco is extremely relevant in this regard.  Costco is a single channel partner through whom Cyanotech can efficiently drive market awareness and brand-identification within a highly-favorable demographic group.  Costco is an enormous distributor of consumer supplements and a very strong and trusted brand in its own right.  For many Costco shoppers, learning that Costco sells something, is reason enough to considering buying that something.

Meridian develops financial models to help it and the companies in which it invests evaluate different strategic options and various performance levels.  Meridian uses these models together with sophisticated tools available to institutional investors to value these various scenarios.  Below are two simple scenarios that Meridian has created and evaluated with these valuation tools.
 

Scenario 1 is a slower growth approach with limited spending on new production and reduced rates of spending on sales and marketing.  This model still shows 10% growth reflecting Meridian's belief that the investment to date will deliver gradually rising levels of astaxanthin production over the next few years.

Scenario 1 has Cyantech adding approximately $10 million in additional sales over the next three years and enjoying higher margins due to improving production techniques.  Running this scenario through a third party valuation application, shows a resulting valuation of approximately $9.93 per share.

Next, Scenario 2 provides for heavier spending on production, sales and marketing, with this greater investment projected to deliver 20% annual growth.  Scenario 2 has Cyantech adding approximately $24 million in additional sales over the next three years and enjoying even higher margins due to economies of scale and increased production efficiencies.  Running this scenario through a third party valuation application, shows a resulting valuation of approximately $22.48 per share."