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StockBeat: Novacyt Starts to Deliver

Published 13/07/2020, 10:44
Updated 13/07/2020, 10:49
© Reuters.

© Reuters.

By Geoffrey Smith 

Investing.com -- Anyone looking for a straw in the wind about the upcoming earnings season could do worse than look at the first-half update from Anglo-French biotech company Novacyt (LON:NCYT).

The stock has risen over 2,000% so far this year, blossoming from a micro-cap into a small-cap, having been early to the party for developing a diagnostic test for Covid-19.

As was to be expected, the stock went hyperbolic during the height of the panic as the virus swept across Europe and the north-east U.S., but subsided as the market narrative turned to one of stimulus, recovery and reopening. As of Friday’s close, it had lost some 50% from its April peak.

But as the narrative around the pandemic develops, so does the investment case. With the World Health Organization declaring a new daily record high for global infections of over 230,000 at the weekend, with the virus evidently out of control in much of the U.S. and the emerging world, and with the remainder of the world hyper-sensitized to the risks of renewed outbreaks, it's clear that the demand for Covid-19 diagnostic tests is here to stay for the foreseeable future.

As such, the news that Novacyt’s revenue rose 10-fold in the first half of the year to 72.4 million euros was arguably one of the less interesting elements of its release. Over one-third of those revenues – 25.4 million euros in all – was delivered in June, which shows how strong momentum is going into the third quarter (bear in mind that the U.S. was still in full reopening mode at the end of June).

“It is a sad fact that as of 11 July 2020, the number of global cases is more than 12.7 million, an increase of 69% compared to 11 June 2020,” the company said (our italics).

The company also noted that it now has “a major distribution agreement for its COVID-19 test with a new global strategic partner” in the U.S., a market that is “delivering significant sales growth.”  

No wonder the company was confident to predict “significant ongoing demand for COVID-19 testing well into 2021.”

Even so, the company’s guidance for the rest of the year seems intriguingly restrained, promising only an unspecified increase versus the first half that hints at some short-term bottlenecks in scaling up.

Novacyt said it expects second-half revenue “to be greater than the first half of the year and margins to be at least at a similar level.”

The corollary of this is, it said, is greater cash generation. So much greater, in fact, that it’s also hinting at going shopping. Novacyt said it’s “reviewing its capital allocation policy to enhance and accelerate long-term value creation through its three-pillar strategy of organic, R&D and acquisitive growth.”

It gave no hint as to whether it might need extra capital to satisfy those ambitions. However, given that the rest of the industry is hardly standing still when it comes to Covid, management couldn’t be blamed for trying to force the pace of growth a bit.

Novacyt stock rose as much as 7% on the news initially, paring gains to trade up 2.1% by 5:45 AM ET (0945 GMT).

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