Profit from this forecast-smashing update

hVIVO (HVO:16p), a rapidly growing specialist contract research organisation (CRO), has smashed house broker FinnCap’s estimates for pre-tax profit for the 2022 financial year. Such is the strength of trading that analysts raised their 2023 and 2024 estimates, too, post-results.

The broking house had predicted hVIVO would move from breakeven in 2021 to underlying pre-tax profit of £5.3mn on a third higher revenue of £48.5mn in 2022. However, buoyed by an increase in cash profit margins (up more than 10 percentage points to 17.9 per cent – substantially ahead of forecast and management’s previous guidance), cash profit more than trebled from £2.9mn to £9.1mn, or £0.5mn above forecast. A key driver was the higher gross margin earned (33.8 per cent compared with 27.4 per cent in 2021), reflecting the leverage afforded by higher occupancy in the group’s quarantine facilities, cross-selling and operational efficiencies.

That’s because the ongoing expansion of the 'human challenge' market and the increasing utility of challenge study data has resulted in both increased demand for larger sample sizes and full‐service contracts that include bespoke challenge agent manufacturing, characterisation study, and human challenge trials. hVIVO has led the industry in creating market awareness and educating the global biopharma industry to the value of human challenge data as a means of de‐risking late‐stage clinical trials. It’s clearly paying off.

Moreover, tight cost control meant that the 5 per cent increase in operational expenses to £12.5mn was £0.2mn below analysts’ forecasts. hVIVO also benefited from net foreign exchange gains of £0.6mn on sales, the other major contributor to the outperformance. Also, free cash flow of £13mn sent net cash surging by the same amount to £28.4mn and shareholders are being rewarded with a one-off special dividend of £3mn (0.45p per share).

Analysts raise forecasts

Expect another year of strong revenue growth as the group delivers on a £76mn record order book that has risen sixfold since 2019. FinnCap expects 2023 revenue to increase by 11 per cent to £54mn, hence why analysts upgraded their current-year pre-tax profit estimate by 12 per cent to £5.6mn. That’s below the 2022 result due to a lower estimated cash profit margin of 16.7 per cent and a projected net finance expense of £0.3mn mainly due to sterling's recovery. That said, there is scope for outperformance driven by contract wins, and the growing order book runs through to 2024, so adding weight to hVIVO matching the 2022 record pre-tax profit performance next year, as analysts predict.

However, even without further upgrades, the group, on an £80mn enterprise valuation, is still only priced on a multiple of nine times cash profit forecasts in 2023, falling to eight times 2024 forecasts, a harsh rating. Net cash is expected to build to £30.4mn (4.5p) this year, rising to £37.5mn (5.5p) in 2024, implying the enterprise valuation to cash profit multiple will shrink to seven times at the end of 2024, a low enough multiple for hVIVO to attract interest from potential predators.

Raised target price

hVIVO’s share price has risen 71 per cent since I initiated coverage at 9.35p (Alpha Research: ‘Ride the boom in vaccine research’, 17 November 2022), and hit a high of 23.4p in February 2023 after I reiterated that buy advice at 14p (‘Profit from this fast-growing contract research business’, 9 January 2023), smashing through my conservative target price of 19p.

The muted response to today’s results is in part due to non-cash write-downs of non-core assets that didn’t form part of my target price and are not material. I am not concerned. This is a repeat buying opportunity. Buy.

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