- First-half cash profit rises 126 per cent to £5.2mn
- 52 per cent higher revenue of £27.3mn
- Cash profit margin expands from 12.6 to 19.1 per cent
- Net cash has doubled to £31.3mn (4.6p) in past 12 months
- Analysts upgrade 2023 and 2024 EPS estimates by 62 per cent and 46 per cent
Analysts have significantly upgraded their earnings forecasts for hVIVO (HVO:19.5p), a rapidly growing specialist contract research organisation (CRO) which tests infectious and respiratory disease vaccines and antivirals using human-challenge clinical trials. The group provides early clinical development services for a broad and longstanding client base of biopharma companies.
Contract momentum continues to build. hVIVO has won five major contracts with a disclosed value of £25.1mn since the start of 2023, adding to nine contracts awarded last year which had a disclosed contract value of £65mn. Moreover, house broker Cavendish believes that the actual value of this year’s contract win could be as high as £40mn, which includes a £13.1mn contract awarded by a top five global pharmaceutical client to develop a bespoke Influenza B human challenge model. Clearly, there is potential for that contract to evolve into a human challenge trial (HCT) and add to a fast-growing order book that offers revenue visibility well into late 2024.
Increasing value offering to pharma and biotech clients
The fact that some of hVIVO’s clients have agreed to cover 90 per cent of the £4.5mn cost of a new state-of-the-art facility at Canary Wharf is indicative of the value that HCTs offer over traditional field trials, as well as the increasing scope of the contracts being signed. Clients want to collect more information than just whether a drug is effective or not; this additional information may include determining the optimal dose, exploring various primary and secondary end points, defining time points for late-stage trials and comparing products developed through different technologies.
A case in point is the head-to-head comparison of a vaccine manufactured using different technologies in a single trial, the goal being the identification of the best candidate to progress to late-stage clinical development. Consequently, a larger number of volunteers are required to obtain statistically significant data.
Bearing this in mind, hVIVO’s new Canary Wharf facility expands the existing number of its quarantine beds from 43 to 50 and has the potential to increase to 70 beds. It will also allow the group to enhance its offering and capacity to external non-challenge study customers with cutting-edge virology and immunology laboratories. Consolidating existing operations into a single location will drive improved operating efficiencies, too.
Major earnings upgrades and M&A potential
Reflecting the record £78mn order book, efficiency savings and a sharp rise in cash profit margins, the board has massively increased its cash profit guidance. Cavendish then lifted its full-year cash profit estimates to £11mn (22 per cent upgrade) on revenue of £55mn, rising to cash profit of £12.5mn (25 per cent upgrade) on revenue of £60mn in 2024.
On this basis, pre-tax profit estimates have been upgraded by 56 per cent and 36 per cent to £8.7mn and £9mn, respectively, to produce earnings per share (EPS) of 1.22p for both years. Furthermore, the highly cash-generative business is forecast to end this year with net cash of £32.7mn (4.8p), which could balloon to £41mn (6p) in 2024, buoyed by free cash flow of £9.3mn. Although the board is looking to make bolt-on acquisitions, hVIVO’s modest valuation and robust trading prospects make the group a target itself. Private equity group Permira has recently agreed to buy rival Ergomed on an enterprise valuation to cash profit multiple of 21.1 times and price/earnings (PE) ratio of 29.6 based on 2023 forecasts. By comparison, hVIVO is rated on an enterprise valuation to cash profit multiple of 9.1 times and PE ratio of 15.5, a big discount to its larger rival.
So, offering potential for upgrades to 2024 forecasts, and scope for corporate activity, too, I maintain my buy call, having first advised buying the shares at 9.35p (Alpha Research: ‘Ride the boom in vaccine research’, 17 November 2022), and last reiterated that advice at 16p (‘A £13mn deal adds to hVIVO's record order book’, 25 July 2023). I am also raising my target price from 22p to 27.5p to reflect the latest earnings upgrades. Buy.
■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com at £16.95 each plus P&P of £3.75, or £25 plus P&P of £5.75 for both books.
