Novacyt - The bull case7 Aug 2020 11:23
I will try and keep this short and to the point.
Without going into the specifics of the company's testing capabilities, it is market leading and has managed to gain a classic 'first mover advantage' in the market. The AstraZ tie-up evidences this. Overall market conditions are very supportive. Low interest rates will keep equity prices high and this is, to some extent, a counter-cyclical company - i.e. if there is a significant second and/or third wave of Covid, this should hold up well. In my view, Covid testing will end up being a 2 years (from February 2020) windfall and will then dramatically tail off, as vaccinations are rolled out to most of the world. There is potential upside that testing will go further but I don't assume that.
Right, some figures for you:
Contracted sales revenue (including received cash revenue and contracted future revenue) to 1 June - £120m
We know that June was another month of growth with circa £20m additional sales
EBITDA margin - 60%
So, as of end of June, NCYT has generated c.£85m contracted cash profit, over essentially a 4 month period.
If this is merely repeated from 1 July to 1 November, we are looking at £280m revenue and £170m cash profit.
The current market cap is £230m, so is likely currently 75% underpinned by my forecasted annualised cash profit.
If you prescribe to the view that sales growth will continue growing at its current growth rate, then the entire current market cap is potentially underpinned by its annualised cash profits. This is crazy and something I can't get my head around. Please let me know what i'm missing!
Factoring in slightly reduced margins from competition (of which i'm sceptical because of the huge demand and the fact that scaling up production is outsourced and not too capital intensive) and on a conservative basis this company is very undervalued. Using my above calculations, the forward p/e is 1.35!
So, what is a fair valuation? -This is tricky, as it's quite a unique business opportunity. To me, the company's valuation should be at least double and more reasonably, triple. If the company can re-invest its substantial profits well and demonstrate future revenue streams and profits to the market (which is no mean feat and will require some good strategic decisions and diversification), then long term this company could re-rate to a normal p/e valuation. There is no visibility on this yet, and so I can't begin to guess the market cap.
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