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Sunday share tips: Motif Bio, BBA Aviation

Sun 24 February 2019 16:36 | A A A

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(Sharecast News) - In her 'Inside the City' column for the Sunday Times this week, Sabah Meddings opened by saying the story of Motif Bio was a familiar one - a drug development firm promising a blockbuster treatment for an underserved disease "crashes at the final hurdle".

The AIM-traded firm has been working on a new type of antibiotic designed for serious skin infections, with its management team - lead by Graham Lumsden - previously telling shareholders that the drug, 'iclaprim', was looking seriously promising in treating specific infections and minimising the risk of drug-resistant bacterial growth.

A note from Peel Hunt in January even praised Motif Bio's "de-risked product" and "undervalued pipeline story", Meddings pointed out.

But the excitement might have all been a bit too early, with the company revealing on Valentine's Day that it had received a "complete response letter" from the US Food and Drug Administration (FDA).

The American regulator said it needed more information over the risk of liver damage from iclaprim, which has already passed two phase 3 trials, with the risk now that the FDA could require further testing.

Shares in Motif Bio plunged 88% in the aftermath, with institutional investors including HSBC and Invesco - which ended up selling 10% of its holdings - suffering heavy losses.

The company's stock close at 7p on Friday, valuing the firm at just £20.8m.

Its board remained optimistic, however, telling shareholders it would look for a positive way forward with the FDA.

But Meddings said investors should exercise caution, noting that this was not the first time iclaprim has stumbled at the behest of the FDA, with Roche spin-off Arpida having to sack most of its staff after the regulator refused to approve the drug 10 years ago.

And despite the market's enthusiasm for the drug in the hands of Motif Bio, with the firm raising $10m in anticipation of FDA approval last May, Meddings added that concerns around liver damage do ring alarm bells, with products previously being pulled from shelves for far less.

The company was now in a "precarious cash position", with only $3m left in the bank after it was forced to repay $7m to its specialist lender Hercules Capital last week.

Lumsden has warned shareholders that the company will need to raise more money to remain viable, although some observers have suggested it was now the time to throw in the towel, with Andy Smith at Edison Securities suggesting management should sell the company and move on.

"While it may sound drastic, Smith has a point," Meddings said.

"Investors might do better putting Motif Bio up for sale - allowing a private company to reverse into it and take advantage of its tax losses.

"It's either that, or be asked to plough millions into a drug that may never make it to market."

Over in the Mail on Sunday, Joanne Hart was focussing on an airport Londoners love to hate - Luton - but was looking at its more premium side, hidden away from the hordes of low-cost holidaymakers in the perpetually-under construction main terminal.

She was referring to 'Signature London Luton' - a luxury private jet facility operated by BBA Aviation, which caters for up to 60 business and VIP flights per day, making it a primary point of entry to the capital for those who live the higher life.

Shares in the company, which operates a number of such facilities worldwide, and also supplies spare parts for older, out-of-production aircraft, were cruising the stratosphere until last summer, when it admitted to the market that conditions in its biggest market - the US - were weaker than expected.

That, combined with the general stagnation seen in the stock market last year, sent its shares down 30%, with the firm closing at 248p on Friday.

But looking ahead, Hart reckoned that BBA had "robust" potential in the long-term, picking that the shares would bounce back.

She wrote that the private jet industry was big business, with firm often opting for the more lavish option to ferry executives from place to place with maximum efficiency and as little fuss as possible.

Some companies own their own aircraft, others charter them on a trip-by-trip basis, and more still rent seats on private planes, but in all cases, Hart said these aircraft park at designated areas of airports, such as 'Signature' at Luton.

Once they land, they still needed the same ground services as the big jets, such as fuel as catering, and the passengers still needed to clear customs and immigration, make use of ground facilities such as dining hospitality and business facilities, and get to their onward travel.

Operating sites like this is BBA's bread and butter, and it is the global market leader, with the firm more than twice the size of its closest rival and operating more 200 'Signature' facilities around the world.

It was expanding, too, having acquired American operator Epic last year, which provides fuel and other ground services at 205 airports.

That massive size was an advantage for BBA, according to Hart, with the company able to better negotiate fuel prices, provide a consistent service to clients, and maintain a good reputation with airport authorities and city administrations.

Private aviation is an industry that tends to ebb and flow in line with the broader economy, meaning optimism had recently been hit by rising interest rates, trade wars, and a souring global outlook, particularly in the world's largest market of the US.

Looking long-term, however, the sector tended to grow around 2% per year, with Hart noting that BBA has been a consistent outperformer, with chief executive Mark Johnstone aiming to improve that outperformance further.

There was still room to grow in the sector too, even as the biggest performer, with BBA involved in a new initiative to connect aircraft owners directly with clients, removing the costly private jet agencies from the equation.

If that resulted in lower prices for private aviation, that should grow the market, which would be a boon for the firm.

BBA was also extending its top-tier services to the ordinary traveller, selling packages where passengers can be met at the terminal by a 'Signature' limousine and be whisked through the airport in minutes, VIP style.

The service was already in place at Luton and Gatwick, with the company set to launch it in the US - where the country's breadth makes domestic air travel huge business - next year.

Its parts business, Ontic, was also set for decent long-term growth too, given most aircraft are capable of flying for between four and five decades, long after many manufacturers stop supporting the airframes, or in many cases, go bust.

Ontic's specialty is sourcing and installing components for such airframes, and it also offers routine maintenance services for older aircraft.

BBA Aviation's results for 2018 are due next month, with brokers expecting revenue of more than $2bn, with that rising to around $2.4bn for this year.

Profits of $304m are picked for 2018, rising to $342m for 2019, with forecasts predicting a dividend of 14 US cents next month, and 14.5cents for the 2019 financial year.

"Johnstone has been with BBA since 2008 but he only became chief executive in April last year and is keen to make his mark," Hart wrote.

"The stock has suffered in recent months but the decline has been overdone.

"At 248p, the shares are a good, long-term buy with a decent dividend yield as well."

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