When a stock trades on a low single digit PER and the shares appear unloved, there is usually a very good reason for such a discounted rating holding sway.
In many such situations, the company concerned is often unlikely to hit the said numbers or are experiencing other issues such as longer term earnings decline.
In the case of SourceBio International (SBI) however, the current rating which sees the shares trading on a forward PER of just 3, could prove every bit as cheap as the number suggests.
Some may wish to do a double take on that number, but according to the most recent note from broker Liberum, SBI is on track to deliver full year 2021 revenues of £156m, which in turn should see a pre-tax profit of £55.3m being delivered.
So where is the catch? As with the shares currently sitting at £1.80p, the business here is valued at £134m which implies excellent value given that the broker is expecting a thumping net cash position by the end of the year at £51.2m.
The issue, or apparent stumbling block, is that SBI has been and is, a major beneficiary on the back of Covid testing through its infectious diseases operation and the timeline is perhaps perceived as limited, hence the discount.
The company only commenced this aspect of its business at the start of the pandemic as Covid spread across the UK, which saw the company finish the last financial year on 10,500 PCR tests per-day. That provided for substantial revenues of £34.5m of SBI’s total £50m figure with gross margins from that operation coming out at 40%, which was ahead of what Liberum had anticipated.
Before adding more on the infectious diseases arm, it is important to concentrate on the core aspect of the business too, which is one I know very well having visited its Cambridge operation some years back in its former life as a fully listed entity on the main market.
SBI is based in Nottingham and embraces a number of areas across the healthcare space including Diagnostics, Genomics along with Storage and Stability.
This sees the company working for and partnering with the NHS, Private Healthcare Providers and the likes of the Sanger Institute as well as various Pharma companies.
Within these areas, SBI provides specialist laboratory testing services along with manufacturing reagents used in kits for serology and molecular genetics across the Genome space.
Not surprisingly, just as its infectious diseases operation has been a major beneficiary from Covid testing, other core aspects of the business have been impacted by the pandemic lock down measures.
However, whilst these areas will see recovery along with growth potential as things open up again, it is perceived that Covid testing will drop away where in the case of the latter, Liberum’s forecasts arguably provide limited visibility. Despite that view, it appears increasingly likely that testing in various shapes and forms are going to be with us for sometime yet and it is a point I raise with SBI Executive Chairman Jay LeCoque when we chatted yesterday.
He doesn’t disagree with my personal take on this and is quick to expand on the infectious diseases operation of SBI saying “we are continuing to partner with the NHS and Private Hospitals in the UK as well as with a major Pharmacy High St chain. With that chain, we are in 65 stores now, but there are plans to get us into 500, but even if it is 250, it’s a decent amount of stores”.
LeCoque also adds that SBI is looking at other areas related to testing, such as venues and travel, where in relation to the latter, he says that airports are now increasingly looking at testing on site, where people will be able to drive through and get a swab test before parking up.
Such measures as they unfold look increasingly likely to figure longer term, as by all accounts, Covid will have to be managed as opposed to eradicated.
LeCoque says in relation to airports, SBI will typically have a mobile unit in place to undertake a test with a result back in a few hours which will further expand their footprint across the UK. Although PCR testing remains the gold standard The Chairman says “the UK Government has increasingly been using the lateral flow tests, which really aren’t that good, but there are now new tests coming through that give a high 90% sensitivity rate. We have a relationship with one of these companies and we are going to be working with them to release that across the UK”. There is also a mention of EKF (covered here on the blog) with which SBI appears to have a close relationship and LeCoque points out that the former now has an antigen test. “Nobody seems to care about antibody testing right now, but we think that might well shift once the vaccine roll out goes forward, so we are ready to go with it. Although we haven’t launched that yet, we believe there will be demand, so we will be ready to do that as well”. Away from the UK, the SBI operation in San Diego, which is home for Genomic and Storage operations, has now been upgraded to include Covid testing and this he says will be operational from June/July. Clearly, there is plenty going on for SBI across this field as a major and respected player, where given the current picture and a requirement for testing as part of the key to unlocking restrictions the runway is perhaps looking longer than currently envisaged.
But, there is more to the business than the recently founded infectious diseases operation and I touch upon Healthcare as a starter with the Chairman.
In a specific scenario, LeCoque explains “typically a patient goes to the NHS or a private provider if they need a tissue sample to determine if it is cancerous or not, the provider then sends that to us, we process it down and send it to one of our pathologists who then take a look at it. The result is then put in a format that the provider can read and determine, so this is what we do as an outsource service provider”.
As things stand, SBI is a major player across the sector and continues to expand its offering and services throughout this division, so there are growth opportunities here moving forward.
Although the operations were impacted due to Covid, LeCoque points to pre-pandemic growth as having been strong and with the backlog that now exists he is expecting things to bounce back very strongly. “Numbers are beginning to pick up again and we are gearing up to support this and it is a very important part of our business, really being one of the crown jewels”.
The company is also looking to expand further in the tissue analysis area which will see SBI providing input into what type of cancer treatment is best suited to a patient.
In relation to Genomics, although it was impacted by the closure of Universities and the like, it nevertheless rebounded better than the team had envisaged. LeCoque stated that following Q2 of last year, it bounced back well with the Sanger next generation sequencing.
Stability storage however, was impacted more than the company thought it would be, largely due to the lock down issues, but he adds that it is a great high margin business. There are also strong levels of recurring service revenue suggesting it is another aspect that looks ripe for further growth moving ahead.
Looking at the Liberum numbers, SBI is forecast to be sitting on net cash of £72.8m for full year 2022 rising to £76.7m in 2023, which will provide the company with plenty of firepower for earning enhancing acquisitions. The Chairman says of the Liberum numbers that they assume that Covid related revenue doesn’t really continue as strongly as it currently is and that they also do not include any acquisitions in the forecasts.
On the latter he says, “Certainly, that is a big part of our growth plans and what we planned around the IPO was to generate some cash and do some bolt-on acquisitions that would support the base businesses. For example, there is a Lab in London that we are taking a look at, that if we were to acquire it would give us a greater presence there. Also, in the US there are similar businesses to us in the healthcare diagnostics area, so we have the cash and we are discussing specific projects where we are talking to two at present. We aren’t going to say anything until there is something done, but it is important to us to take that cash and invest it”. LeCoque also says that they are comfortable with the current numbers out in the market which the broker has highlighted as being second half weighted.
Whilst such terminology is often perceived as a prelude to a reigning back, things look intact at SBI and the shares appear not only excellent short term value, but attractive as a longer term play too. The Liberum EPS figure for the year in play is for 60.4p, a big jump on the recently delivered 19.8p, although for 2022 it sees this reducing to 15.4p. Taking the latter number this sees the stock standing on a forward PER of 11 which still looks very good value, particularly given the strong and soon to be bulging cash position.
However, the risk here may well be skewed to the upside as ongoing testing may well be required for the foreseeable, as new variants continue to emerge, which in turn would further bolster the SBI numbers.
Additionally, as the NHS and Private Hospitals look to accelerate on the testing backlog, the company is very well placed to ramp up, whilst a decent acquisition out of its own cash would also provide for earnings upside with no dilution.
It should be interesting to see where the shares head over the next year, as further news flow looks likely both across infectious diseases and other aspects of the business.