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So what does all this come down to in a relatively short term? Here's my view;-
I have the company producing 10m tests per month at that point and for ease of maths receiving £1bn in annual revenue. If profit or earnings is 50% at the moment I have it about 55% at least by then. I could work it the DCF more accurately but there seems little point at this stage.I believe a reasonable P/E ratio by then to be between 3 & 4 at least. That would give the company a notional Market Cap £1.65bn & £2.2bn. Derived from that we get to an SP of between £22 and £30 providing the shares in issue stays the same.
Where we are now the earnings figure should be around £300m annualised and the p/e possibly 2. If that's right we get to a SP of between £8.50 providing the shares in issue stays the same.
The argument that the argument knows best is laughable and old fashioned. Even if it did hold merit it can't apply to companies ramping up. Science has the market as being always behind the curve. Hence the volatility we're witnessing in the SP. Investors make the market and they're not sure what to make if Novacyt at the moment.
Fingers crossed!
AIMHO.
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In establishing the p/e ratio Analysts will consider other all manor of erogenous factors . Things like goodwill, the skills and competence of employees and the company's risks, its structure it’s location for example. The earnings metric works best by taking the fundamentals from when businesses are running in an optimised and steady state.
When businesses are ramping as Novacyt is the cash flow must be discounted in any assessment.. However it should still take the economies of scale into account and follow the trend rather than the daily SP fluctuations.
It is very apparent that whoever has designed Navacyts business model has done an excellent job. As an Outsider I don't know the micro details but from a macro view the fact that they have adopted a modular concept speaks volumes. Under the approach they are able to control production both up and down here in the UK simply by bolting on another module (production partner) or by removing one from the chain.
On 15 April Novacyt announced plans to increase manufacturing capacity to approximately 8m tests per month. Novacyt is on track with this scale-up and expects to achieve at least this level of output during this month.
Novacyt has signed agreements with six sub-contract manufacturers in addition to its own two production sites in Southampton and Camberley. which provides greater contingency and the flexibility to scale-up its manufacturing outputs beyond eight million tests per month when necessary.
But it's more than just about numbers. Novacyt have also adopted a strategic approach. They have covered production across the UK and whilst that obviously cuts logistical costs it is not the main reason. It’s secondary. The main reason is it cuts down the time it takes to get the results. It’s an important factor in the fight against the virus. Test results must be available within 24 hours. It’s crucial.
I believe Novacyt will achieve an optimised and steady state for it’s first phase here in the UK by October this year. There may well be subsequent phases here achieved by bolting on more modules but the details of those are undisclosed.
It’s not difficult to imagine that if the business works well as a unit here Novacyt may well consider “baking another cake” in other countries too. Germany certainly springs to ming and I doubt finance will be an impediment.
Novacyt is such an attractive business and has set standards others in the space can only envy. It’s because of that we as shareholders need to be on our guard against aggressive suitors. We must not allow the business to be taken from us on the cheap. We need to share our opinions and understanding of what the company is worth. In my view it’s currently considerably undervalued.
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When and if the pandemic subsides I believe we'll see epidemics springing up around the globe. In our fight against it we are going to need Antigen and Antibody tests along vaccine and drugs. Everyone will have a rightful place in our toolboxes.
When the disease is under control demand will not just come down to how many tests will be needed for testing per sa. It’ll be more to do with “capacity needed” in readiness for Governments and Institutions etc to cope with further outbreaks or even another strain.
Antibody tests have an eighteen month shelf life and the cost in economic terms and human lives through being caught out again in future is unthinkable. So I firmly believe we'll see a stock of both Antigen and Antibody tests being kept in reserve at all times across the world. Supply will struggle to match testing demand let alone provide sufficient to replenish stocks in my view. Do some fag packet numbers and you will be surprised.
On the second principle it’s true to say the SP is volatile and profit isn't constant just yet.
As with any newly producing company there will be a point when it establishes an "optimised and steady state" but for Novacyt we may yet see a series of these and the business could well be developed in phases.
Understanding the development path isn't too difficult . Novacyt has been following a ramp up profile which from a distance follows a logarithmic curve since early this year. Closer to the curve the peaks and troughs of daily SP movements will be more noticeable but for valuation purposes the curve should be seen from a distance where it appears as a trend.
Think of it as the curve a car follows under maximum acceleration. The car's acceleration is its fastest at the beginning of the curve and it slows progressively until it reaches its maximum speed or its optimised state.
Conversely it's earnings or profitability expressed in unit terms (per test) will almost certainly follow an exponential curve. It increases rather than slows as it undergoes the effect of “economies of scale”.The more units produced the cheaper the unit costs. Fixed costs which all companies have are progressively diluted as the production increases.
The principle of the "earnings" metric takes the net profit and simply multiplies it by a factor or ratio. (the price/earnings ratio)
The ratio can be best established by benchmarking against a businesses piers or where that is not possible the lifespan or other factors such as risk or debt ratios as may be appropriate.
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If you're reading this with a rigid view that Novacyt will continue losing value from here or that for whatever reason you no longer want to stay invested then please don't bother to read this. It's not intended for you and it's unlikely to be of interest.
I don’t post very often and when I do it's only my own honest opinions I give . Without exception.
There are many ways of valuing Novacyt and views on the one that applies a "p/e multiplier" being exchanged on here recently. I recognise the method as one based on using an earnings metric and it’s one of my favourites.
It's just one of three of the most common ones used by Analysts. The others being one that's asset based and one that's based on benchmarking against similar companies in the space. Those producing COVID -19 Antigen tests that is.
Professional Analysts or rather the better ones will use several methods to value businesses and then take a weighted average. Of course the real value of anything material will be what another party is prepared to pay for it. In other words more of a commercial approach taking expert valuations as references.
A commercial offer from a suitor may be more than or less than an Analysts valuation. As often happens an initial offer may be less but may not be the best one the offeror may make. Almost invariably it’s not.
Some will argue the earnings metric method is inappropriate in Novacyts case. But support for that argument can only come from two principles in my view.
The first principle is the one that says the demand for Novacyts tests will fall off substantially in a relatively short time once the pandemic passes.
The second principle says that Novacyts fundamentals are too unstable to use it whilst it's in its ramping up state.
It pains me very much to say that under the first one demand is unlikely to exceed supply for some considerable time to come. This virus isn't going away anytime soon unfortunately. Before the pandemic is over we're likely to see hot-spots flare up in areas where the "R" value creeps above 1. These areas will call for a high degree of testing approach under local authorities guidance. We're already seeing it in fact.
Excellent post - thanks tedoby
yes tedoby excellent posting. i like the "baking another cake" suggestion. Would that be licensed out? or still controlled by novacyt?
Hats off tedoby - that is a great post.
Nice work there Ted
Thanks for your feedback and comments guys!
Chin chin and fingers crossed!
excellent summary !!
2.36 to sell
well above mid price
For anyone that missed this from Tedboy today..
Just read above
Fantastic post Ted.
Does anybody know how many shares Nova can issue without a vote or how many they have in reserve ?
1111112 they don't need to debt freeeeee and money in the bank.
All options have been excised as well. No risk of share dilution any time soon imo.
Interesting extract from BBC website about the latest Government go at Covid suppliers. Looks like they are picking over all contracts to try and wriggle out of paying, not just Novacyt.
A Department of Health and Social Care spokesperson said: "We can confirm that we have commenced legal proceedings in the High Court against PPE Medpro Limited for breach of contract regarding gowns delivered under a contract dated 26 June 2020.
"We do not comment on matters that are the subject of ongoing legal proceedings."
The government has previously described the PPE Medpro medical gowns deal as an "underperforming" contract.
In a statement, the company said it was clear by the end of 2020 that the government had "vastly over-ordered" PPE and would never be able to use it all.
It said consultants had been brought in to "pick over all the contracts" on "technicalities".
The Medpro situation is the current high profile newspaper chasing case.
The Michelle Mone situation has brought this one to prominence.
Tomorrow's Fish & Chip wrappers.
Brent PPE Medpro is very different from NCYT, it was set up overnight and supplying simple stuff badly and expensively and linked to political favours. BUT, not to say they weren't all on the same list, but hoping NCYT was much further down.
Interesting thread, blast from the past, an interesting read, that kid's posting history is impressive they write essays
Stopped reading at £1bn revenue. What an absolute load of nonsense.
That post was dated 8th June 2020 - talk about getting wound up over nothing.
It was just the bit about 'consultants pouring over contracts' that interested me. I suspect that's happened to almost all suppliers and that the Gov want to get out of anything that they can. Not comparing Nova to Medpro in any way BH
I guessed that Brent and the 'consultants poring over contracts' bit, it was a general consoling that hopefully it wasn't that bad. But all contracts are pored over it's a contract thing. I suppose the added danger is HMG's 'buyers remorse'