EKF DIAGNOSTICS

24/07/2020

This was my first article on EKF, following a long chat with CEO Julian Baines:

EKF Diagnostics has recently been described by broker N+1 Singer, “as one of their best ideas for 2020”.
Additionally, the same broker recently pointed out in a note that
“despite a lot of noise around potential Covid-19 diagnostics and therapeutics, EKF remains one of very few UK-listed companies actually generating material revenues”.

Little wonder then, that despite a more recent flat lining the shares have since March, increased from the 30p range to a current 46p valuing the business at circa £200m.

Whilst some investors watching from the sidelines may consider that the shares have perhaps now run out of steam, the reality may well be that EKF has much further to go, not merely in the near term, but as a medium-longer term play.

To get a better handle on the business and its prospects both immediate and further ahead I have been fortunate enough to speak with CEO Julian Baines, who sounded a bullish note on prospects for the business.

Although I want to hear about all of the areas EKF covers, the recent and current excitement has been focused on PrimeStore, the novel viral transport media for infectious diseases.
To this end Baines says “we are really very busy at present and I don't see that slowing down at all, particularly with the flu season commencing just two months down the line. Importantly, with Covid19 around at the same time as flu there will be a need to differentiate, so things will have to ramp up phenomenally”.

From a personal perspective Baines doesn't see a vaccine being widely available for at least a year and even then he says testing will still be required and this ties in with recent comments from other commentators that the virus is going to be around for some time to come and could cause significant issues in clashing with the forthcoming flu season.

Despite much of the focus having been on the US where Longhorn the owner of the rights to PrimeStore is based, Baines tells me that it is now gaining traction elsewhere. “We have of this week commenced manufacturing in Germany and now also have sales in Africa and there are also discussions taking place in India, so a lot is happening”.

The UK is also now ramping up Baines adds which has been assisted by a recent report from Public Health England that recommends PrimeStore as being the safest device for transportation.

Although the device may well be more expensive than those on offer from competitors, the benefits clearly outweigh any monetary consideration as the reagent deactivates COVID-19 (and other viruses, bacteria) on contact and does not require cold storage. This means that the sample can be sent and analysed at a cat 1 lab, cat 2 lab or cat 3 lab, opening up more opportunity to analyse the tests.

This enables for much more testing, a speedier response and less restrictions where the CEO points out that PrimeStore is not dependent on a specific temperature and can be transported by a normal carrier.

He also adds that as part of the UK adoption the company has very recently had to take on an extra 20 staff which suggests that the expectation of a gearing up is set to gather pace.

The PrimeStore deal with Longhorn sees EKF as the ‘key manufacturer of the critical reagent that goes into the tube and the company has been increasing its operations in the US.
Despite the recent positive broker upgrades, it is perhaps worth noting that currently, the most recent note does not make any provision for US orders beyond September or for that matter any orders from the UK and Europe.

Indeed, the broker added earlier this month that receipt of such, would present further upside potential.
No point in attempting to second guess what that could provide in terms of additional income and profits, but suffice to say one would expect a potentially decent uptick in EPS.

But, while investors have concentrated their minds and arguably rightly so on PrimeStore, there is so much more to EKF which provides for a longer term interest that could see the company driving to sustainable increased revenues and growth.

Baines explains to me the three areas of the business which includes point of care, the largest generator of revenue covering diabetes and hematology.

As an example, EKF's device the Quo-Test HbA1c analyzer is a highly acclaimed fully automated desktop point-of-care device for easy reliable measurements for the monitoring and management of diabetes in a point of care setting.
Such an analyzer is, in an age when diabetes is on the increase a much needed piece of equipment and where optimum performance is required, then the Quo-Test is considered a stand out.

With lockdown however there were understandably issues around point of care services and thus a slowing down for EKF.
To this end Baines says “its actually not turned out to be as deep as we first thought or feared and the base business is now coming back on line. Quite a bit didn't actually fall off, as after all, with a lot of this there is a must need to test”.

With various partnerships and deals in place away from PrimeStore, EKF also retains a stake in quoted Renalytix which is currently worth north of £14m.

It is something investors have picked up on and Renalytix now with a Nasdaq listing is gaining ever increasing awareness.
The interest isn't lost on Baines and we touch on that and the rather nice cash pile EKF sits on which is forecast to come out at £20.5m for the financial year ending 2020.

Regarding cash the CEO comments on working capital, “we don't actually need too much in the way of that, we aren't really a capital intensive business as some years back our Chairman had the foresight to focus us on automation”.
So, what about the money I have to ask, increasing and progressive dividends perhaps. “We will pay dividends yes, but there are other ways of utilising the cash for the benefits of shareholders and we have some ideas on that”.
This doesn't appear to focus on any potential acquisitions, rather, it is more about strategic investments that may mirror Renalytix.

EKF has a relationship with US based Mount Sinai Innovation Partners and this, explains Baines, presents significant opportunities for EKF to collaborate on ground breaking medical technologies that can be spun off and proceed down the IPO route.
Baines sounds excited about the prospects and potential in this area and points out that the partners are made up of the very top people in their field in the US and there are some ground breaking novel developments.

Although there is clearly much going on at present within EKF, the shares for now appear constrained by a seller.
However, there were signs yesterday afternoon on heavy volume that any seller could now have been cleared which aligned to any further positive news flow could quickly ignite the stock to a higher and more reflective level.