EKF Diagnostics delivered its full year 2020 results earlier this week which came in not surprisingly, with some very strong numbers. Over the last twelve months, EKF has been a great performer for me, rising from my mid 30’s entry point to a current 80p which values the business at £373m.
During the last year I have been fortunate enough to catch up with the CEO Julian Baines on a few occasions and the write ups on the back of those are here for further historical interest.
Unfortunately, this time round I was unable to speak with the man at the helm, although I am hoping that something can be set up soon for further substance.
Valuing EKF isn’t the easiest of tasks though as there are a number of different moving parts, much of which I have covered in those previous articles, but suffice to say it remains for me an attractive play in the healthcare space. Clearly, the trend of consecutive upgrades has been led by its involvement across the Covid testing space and further news on that front accompanying the results provides for ongoing exciting prospects.
More on that in due course, but for now, it is worth recapping on the final numbers and a mention of the broker comment and forecasts, as not everyone has access to such info. Revenues to 31st December 2020 came in at £65.3m providing for EBITDA at £24.4m which in turn saw adjusted pre-tax profits of £21.9m. Adjusted EPS of 3.8p was recorded putting the stock at the current price on a PER of 21. Broker N+1 Singer commented:
“Having upgraded several times in the year, EKF’s FY20 results are as expected and show a step change in the performance of the business.
Whilst this has been catalysed by the pandemic and sales of sample collection devices, the core business has held up relatively well and is showing an encouraging return to growth in Q1.
The main new news this morning is a significant multi-year, multi-million dollar contract expansion for sample collection devices with a multinational private sector partner.
We push through further material upgrades to FY21E revenue and PBT of 23% & 40% respectively and see further upgrade potential if demand persists and continues to grow.
Event Turnover increased 45% to £65.3m (N1Se £65.0m) driven by strong demand for sample collection devices, which contributed £26.8m of revenues in the year.
This in turn implies core revenues were £38.5m, down 14% YoY despite the considerable disruption caused by the pandemic and testament, we think, to the robustness of the offering. The main impact was on Haematology sales, which declined by 20%. Positive progress from DiaSpect Tm (+15%) offset weakness in Hemo Control (-36%).
Diabetes sales held up relatively well at -8%, but impacted by a reduction in global testing volumes and a tough comp for BhB. Central Lab sales (ex-sample collection) declined 21%, with some delays experienced in development projects being worked on, albeit these are expected to recommence in FY21.
Gross margins strengthened considerably on favourable mix to 57.3% (from 52.8%) and, with a tight control on overheads, this meant adj EBITDA increased by material 113% to £25.5m (N1Se £25.4m) and EPS +124% to 3.8p (N1Se 3.6p). A dividend of 1.1p has also been declared”. As highlighted in the note, EKF also announced alongside the results that it has now signed a new multi-million dollar global supply contract with a private sector partner related to covid testing.
This is excellent news for EKF and follows on from the original inked contract that was announced in August of last year and which was focused on the supply of covid sample collection kits.
Those were to be used by the client as part of its staff testing programme in the UK and was worth an initial £3m to EKF. The new contract is a significant expansion from the UK deal, stretching across the globe at the customers operations in order to test employees and is in place for at least two years.
The big and intriguing question for investors or indeed those looking for an entry here is exactly who this customer is, as there are few companies that can really fit the bill, particularly with such a vast headcount and a seemingly major presence across the world. Looking at the bulletin boards some respected and more informed posters have come up with name of Amazon based on some sound reasoning and which if correct, is clearly a major coup for EKF. When I last spoke with the CEO, we touched upon the original contract and he stressed the point that EKF was not in a position to announce the name of the customer, obviously due to reasons of confidentiality.
However, those hitching on to the Amazon name appear to my mind to be very near the mark, not least, aside from the sheer level of employees concerned there is also an interesting timeline of events around this space. EKF announced the initial deal back in August and it was pretty obvious what type of business we were looking at given that many companies had embarked on the remote working stance. Interestingly, Amazon had a very extensive blog covering this area back in October of last year, which in part talked of Antoine Dreyfus, former director of Amazon devices in the EU, leading a project in the United Kingdom regarding testing employees.
The article added, “Providing regular testing for our employees will allow us to identify asymptomatic cases who might not otherwise be tested. We’re able to catch the virus earlier and place those individuals in quarantine, with full pay, so they can recover before infecting others. We believe this programme will help save lives.”
There has also been as recently as last month authorization from the Food and Drug Administration for Amazon relating to Covid-19 testing, just a few weeks ahead of the EKF announcement. Nothing confirmed of course for EKF, but it looks very much as though Amazon could well be the subject of the first and latest contract news, so it should be interesting to see what further developments may come through. Whilst at the current price it is understandable that some may view the stock as up with events, I nevertheless remain bullish on the prospects here and will continue to hold or add on potential weakness. EKF is not a business that actually relies on the covid headwinds though, as it has a very attractive core business operation in different areas of healthcare and the diagnostics space as can be seen from the broker comments above. Additionally, it has already proven adept at generating value for shareholders through spin-off’s such as Renalytix and there appears to be more to come from that end as we move forward. But, returning to the immediate covid testing space, it appears apparent that the very nature of this pandemic and the awful disruption it has caused is likely to see testing continuing for a number of years to come.
That suggests further strong figures and potential for additional business across the area to come. For now, N+1 Singer has pencilled in numbers for full year 2021 with revenues of £65m, EBITDA at £20m and adjusted pre-tax profits of £17.5m.
Although that will see adjusted EPS reduced from the just reported 2020 figures, the new and latest upgraded forecast for 2021 is, according to the broker cautious.
With the core business recovering and likely to accelerate as the opening up process continues and this latest covid contract news potentially bringing further upside potential, it looks likely that the trend for continuing upgrades will follow the recent trend.
If I do manage to catch up with Julian Baines in the next week or so, I’ll duly add some further comment here for additional interest.