Business is booming at hVIVO

Aim-traded hVIVO (HVO:29.35p), a fast-growing specialist contract research organisation (CRO), has upgraded earnings guidance yet again.

hVIVO provides early clinical development services for a broad and loyal client base of biopharma companies. It is the only CRO focused on challenge studies, providing expertise and capabilities in challenge agent manufacturing. It has a portfolio of human challenge models to test a range of infectious and respiratory disease products, and specialist drug development and clinical consultancy services.

Business is booming. In a pre-close trading update, the company revealed that it delivered the highest number of inoculations to date in 2023, driving revenue and margins higher. Moreover, hVIVO is benefiting from increased staff utilisation, a client-funded facilities expansion, and efficiencies gained through improved volunteer recruitment and the concurrent running of multiple clinical trials. So, although the 15.5 per cent rise in 2023 revenue to £56mn was slightly higher than house broker Cavendish had anticipated, hVIVO’s profitability was materially higher.

Profit booming

Factoring in the expansion in cash profit margin from 18.7 to 22 per cent, analysts at the brokerage upgraded their 2023 cash profit estimate from £11.5mn to £12.8mn (before share-based payments of £0.5mn), up from £9.4mn in 2022. The impact on pre-tax profit and earnings per share (EPS) is even more accentuated given that all the £1.3mn cash profit upgrade passes through to operating profit. Indeed, Cavendish raised its 2023 pre-tax profit and EPS estimates by 14 per cent to £10.5mn and 1.5p, respectively.

Furthermore, hVIVO landed a £16.8mn full-service contract with an existing top-five global pharmaceutical client to test its respiratory syncytial virus (RSV) antiviral drug candidate using the company’s RSV human challenge study model. The majority of the revenue from the December 2023 contract award will be recognised in the 2024 financial year and the company has recently signed a £6.3mn contract with a biotechnology client to test its antiviral candidate using the hVIVO Human Rhinovirus (HRV – common cold virus) human challenge study model. Revenue from this contract will be recognised in 2025 and 2025. This means that 90 per cent of the company’s £62mn annual revenue budget for 2024 is already contracted, thus offering strong revenue visibility to underpin Cavendish’s newly upgraded cash profit and pre-tax profit estimates of £14mn and £10.9mn.

Burgeoning cash pile and modest rating

It’s also worth flagging that hVIVO’s cash pile continues to grow, rising 30 per cent to £37mn (5.5p) in 2023, or almost a fifth of its £199mn market capitalisation. This means that the shares are rated on a cash-adjusted forward price/earnings (PE) ratio of 15.8 and on a modest multiple of 11.5 times 2024 cash profit estimates to enterprise valuation. To put hVIVO’s rating into some perspective, private equity group Permira acquired rival Ergomed on a PE ratio of 29.6 and 15.1 times cash profit to enterprise valuation.

The progress being made has not been lost on investors as the share price has more than trebled since I first advised buying (Alpha Research: ‘Ride the boom in vaccine research’, 17 November 2022) and is almost 50 per cent higher than when I highlighted the company’s takeover potential (‘Four small-cap takeover targets to exploit’, 8 December 2023). That said, the shares still offer a further 19 per cent potential upside to my 35p fair value target price, and far more if hVIVO continues to overdeliver, makes an earnings accretive acquisition or attracts the attention of a predator. Buy.

■ Special offer. Simon Thompson's books Successful Stock Picking Strategies and Stock Picking for Profit can be purchased online at www.ypdbooks.com at the special discounted price of £5 per book plus UK P&P of £4.95, or £10 for both books plus UK P&P of £5.75, subject to stock availability.

They include case studies of his market beating Bargain Share Portfolio companies outlining the characteristics that made them successful investments. Simon also highlights other investment approaches and stock screens he uses to identify small-cap companies with investment potential. Full details of the books’ content can be viewed on www.ypdbooks.com