Omega Diagnostics Group Plc

Omega Diagnostics Group Plc (LON: ODX) is an FTSE AIM All-Share index listed Company founded in 1987. It is a medical diagnostics company focused on infectious diseases and food intolerance.

On 13 July 2021, the Company will announce its FY2021 results.

Investment Rationale for Valuation – Speculative Buy at GBX 51.00

• The UK government is extensively focused on healthcare, with a recent announcement of £36 million on healthcare research.
• Under a contract with the UK government, ODX would offer manufacturing capacity for COVID-19 lateral flow antigen tests.
• ODX targets approval for its VISITECT® COVID-19 Antigen test by the end of July 2021 for commercialization in Europe. It has fulfilled the WHO target diagnostic accuracy recently.
• On the liquidity front, the current ratio in H1 FY2021 is higher than the industry median of 1.72x.
• On the leverage front, the debt/equity ratio in H1 FY2021 is below the industry median of 0.14x.
• In the last two years, the stock has achieved a higher return than its benchmark FTSE AIM All-Share index. There is a good chance that this trend could continue in the future.
• On the technical front, 14-day RSI at about 33.71 is sustaining just above the oversold zone, indicating a potential uptick in the stock price in the near term.

Key Risks

• ODX is a loss-making company as per H1 FY2021, which could put stress on its liquidity.
• The growth of the business is reliant on external funding, which is challenging to obtain.
• There could be delay under the contracts, which would lead to cost overruns as well as loss of reputation.

FY2021 Trading Update (released on 11 February 2021)

• ODX received a contract from the Department of Health and Social Care (DHSC), which offers significant growth potential.
• In the Food Intolerance division, sales in FY2021 are expected to 19% down from FY2020 sales. However, it is an encouraging result as Q1 FY2021 food intolerance sales were 47% down from Q1 FY2020 levels.
• The management expects that ODX revenue for FY2021 would be ~£9.3 million, with an EBITDA loss between £2.1 million and £2.3 million.
• Despite significant capex, FY2021 cash position is expected to be between £5.5 million and £6.0 million.

One Year Share Price Chart

(Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

The UK government has a significant focus on research and development in healthcare. ODX has significant growth opportunities in FY2022 driven by the approval of its Covid-19 antigen testing and formal relationship with the UK government. The management expects that the DHSC contract would have a significant impact on ODX. The stock made a 52-week low and high of GBX 32.01 and GBX 127.00, respectively. On the technical chart, the next important support level is GBX 40.00.

Based on better liquidity and leverage profile of the Company than the industry, its favourable prospect driven by the approval of its Covid-19 antigen testing, the UK government manufacturing contract, and support from valuation as done using the above method, we have given a “Speculative Buy” recommendation on Omega Diagnostics Group Plc at the current market price of GBX 51.00 (as on 22 June 2021, at 1:10 PM GMT), with a lower double-digit upside potential based on 77.57x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

*The reference data in this report has been partly sourced from REFINITIV.

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).

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