Novacyt SA

Novacyt SA (LON: NCYT) is a France-based Clinical Diagnostics Company. It deals in diversified diagnostic products used in oncology, haematology, microbiology, LBC, and serology testing.

Rationale for Valuation – Speculative Buy at GBX 423.95

• On 9 April 2021, the share price of Novacyt SA fell sharply after failing to renew a second supply contract with the DHSC. In Q1FY21, 50% of the revenue was attributable to DHSC sales.
• The Company expects future growth opportunities, with the continued growth in international sales and expansion, in the private sector testing operations.
• For Novacyt, the full year 2020 has been transformational and delivered over 20x revenue growth from prior period.
• The Company has a decent fundamental metrics as it has maintained a Net margin and ROE above the industry median.
• On the leverage front, the debt-equity ratio is 0.04x, which is lower than the industry median of 0.13x, reflecting that the company is less leveraged than the industry.
• As per the valuation metrics, the EV/Sales multiple is currently lower than that of the Biotechnology & Medical Research industry.
• From a technical standpoint, 14-day RSI (28.86 levels), supports an upside potential.

Key Risks

• Recently the Company has announced that its supply contract with the UK Department of Health & Social Care was not renewed.
• The pace of development in the healthcare industry and competitive pressure may impact business operations.

Trading Update (for the three months ended 31 March 2021 (Q1 FY21), as on 9 April 2021)

• In Q1 FY21, the revenue increased to €83.0 million.
• It saw an expansion of the Company's private sector testing operations, with the continued growth in international sales.
• In Q1 FY21, NCYT launched mobile processing laboratories for private sector testing and SNPsig® portfolios to detect COVID-19 variants and saw a good demand in both these portfolios.

One Year Share Price Chart

 (Source: Refinitiv, Thomson Reuters)

Conclusion

As per the diagnostic testing demands and the ever-changing nature of the COVID-19 pandemic, the Company expects limited sales visibility. The board is confident that they will win new contracts, further expanding international sales and private-sector testing. In FY21, the revenue and profit are expected to be lower than current market expectations, led by the absence of the DHSC contract extension. Moreover, the Company is working on the new Covid-19 lateral flow products, which also expands its ability to meet evolving Covid-19 testing demands. Overall, it seems to be well-positioned to capitalise on future growth opportunities with its expanding product portfolio and service offerings. The stock had made a 52-week low and high of GBX 202.75 and GBX 1,276.00, respectively.

Based on the decent growth prospects, we have given a “Speculative Buy” stance on Novacyt SA at the current market price of GBX 423.95 (as on 14 April 2021 at 2:30 PM GMT).

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