EKF Diagnostics initiates post-Covid transformation

EKF Diagnostics (EKF) – like many other biotech companies that found themselves in demand during the pandemic – is having to adjust to a post-Covid profit landscape. According to its half-year results, the company recorded a “sharp drop” in Coronavirus-related revenues in its contact manufacturing division in the second half of this year. Its pre-tax profit consequently fell by more than half year on year.

Management had, of course, foreseen that trouble was on the horizon and had already begun trying to pivot away from products and services linked to Covid-19. In their place, the company plans to focus on “higher-value” contract manufacturing operations. However, EKF noted that transitioning both its contract manufacturing and laboratory services businesses towards non-Covid revenue streams remains “our key challenge”.

Its life sciences division, which makes enzymes and biomolecules, fared somewhat better. Revenues for EKF’s specialist fermentation business doubled year on year to £2mn. The company said the global specialty enzymes market is currently experiencing rapid growth “driven by the increased application of enzymes in the diagnostic industry, as well as the food and industrial sectors”. It is consequently investing in expanding the Indiana facility that houses its fermentation equipment.

Investec Bank expects the upscaling of life science manufacturing to drive “top-line growth and margin expansion” at EKF in years to come. Compared with the company’s first-half 2019 (pre-pandemic) benchmark, it says revenues are still up 74.8 per cent from £21.4mn. While Investec analysts say that strong cash generation and growth potential beyond Covid are “not recognised by current discount multiples”, we think a 21.8 times forward P/E ratio is fair value for a company undergoing major changes. Hold.

Last IC View: Hold, 44p, 29 March 2022