Beaufort Securities view on Advanced Oncotherapy (AVO).
It always comes as a surprise when the market reacts violently to some news item whose impact was considered already to be priced-in. Yesterday’s announcement told shareholders nothing new. Back in November, AVO detailed the fact that Sinophi was no longer to proceed with the installation of LIGHT technology in the China-Japan Union Hospital of Jilin University in Changchun and First People’s Hospital of Huai’An. Back then, AVO also confirmed that the orders for the two machines remained in place as per its agreement with Sinophi and that they were assessing other sites in the same cities as well as pursuing other framework agreements in China.
Realistically, however, given the bespoke nature of the two original contracts, it was clear that no ‘replacement buyers’ would be found and formal termination was only ever going to be a matter of time. AVO’s management always insisted, however, that the contractual details simply do not permit the originator to ‘walk away’ and that there never was any binding legal agreement with respect to delivery schedules. More to the point, the contracts were composed under English law and both companies have registered offices in the UK. Nevertheless, it would never be in either of the company’s interests to see their argument fought out in the courts, particularly for Sinophi which undertakes very large operations in China where partners would be highly sensitive to any suggestion that it had not looked after its client interests correctly. As such, assuming AVO’s legal counsel has correctly advised it, the dispute will more likely be argued behind closed doors and result in reparations being made to partially compensate AVO for its loss of profit opportunity amounting to, perhaps, a few million US$. Given the pressures on AVO’s balance sheet, any such payment would be welcome although, of course, it would still represent an unfortunate outcome from what initially had appeared to be a quite remarkable business opportunity. In this same respect, Monday’s announcement regarding the possibility of the Group securing non-dilutive financing from a ‘strategic partner’ (which Beaufort believes to be the French giant, Thales Group), also provides some hope for those fearful that AVO will otherwise be forced to undertake further discounted equity placements.