On Thursday 18th July, I asked whether the shares of EKF Diagnostics (LON:EKF) were a Buy at the then 31p.
Since then, they have been up to 32.90p and down to 26.30p – after this week’s Half-Year Report, I answer my own question.
Now at 28p, I consider that the shares of this £125m capitalised global diagnostics business are primed for a recovery rise.
It may be some time for them to get back up to the 94p that they reached this time three years ago, even so I can see them putting on a neat-25% gain within the next six months or thereabouts.
The Business
Based in Penarth (near Cardiff), EKF operates five manufacturing sites across the US and Germany, selling into over 120 countries worldwide.
It is a global diagnostics business, whose two main divisions are focussed upon: Point-of-Care analysers in the key areas of Haematology and Diabetes; and on its Life Sciences services which provide specialist manufacture of enzymes and custom products for use in diagnostic, food and industrial applications.
Half-Year Report
The six months to end-June 2024 reported on Tuesday of this week, indicated a period that showed strong improvement in gross margins, earnings growth and cash generation, in-line with management expectations.
Reflecting winding down of non-core and low margin product lines and services the Interim revenues from continuing operations were £25.2m (£26.9m), while the profit before tax of £3.1m (loss £0.03m).
Chairman Julian Baines stated that:
“The Board remains confident in the outlook for the business overall and with orders already in house for the second half we are very confident that the Point of Care performance in Europe, Middle East and Africa will improve significantly.
The actions we’ve taken are expected to yield further improvements in gross margins, earnings growth and cash generation, and as a result of our efficiency drive we now have a leaner business, with a cost base correctly aligned to a more focussed higher-margin product mix.
The Company expects the improvement in performance to continue in H2 2024 and remains confident that full year results will be in-line with market expectations.”
Analyst Views
The trio of analysts at Singer Capital Markets – Chris Glasper, Karl Keegan and Edward Sham – rate the group’s shares as a Buy, looking for 39p in due course.
They noted that the Interim results show a strong improvement in margins and cash generation as a result of self-help measures and strong execution from management taking effect.
They state that the outlook remains positive, with H2 looking well underpinned by orders already received in the Point-of-Care division and further growth from the newly commissioned Life Sciences manufacturing plant in South Bend.
The analysts reckon that despite the tangible evidence of progress, with the shares remaining at depressed levels, trading on <10x EV/EBITDA, falling to <8x, underpinned by a solid balance sheet and a FCF yield of 6%.
However, they do continue to believe that undervalues both the core Point-of-Care business and the significant growth potential in the Life Sciences division.
For the current year to end-December, they estimate revenues of £53.0m (£52.6m), with adjusted pre-tax profits of £6.6m (£6.7m), generating earnings of 1.0p (1.5p) per share.
The 2025 year could see £56.6m sales, an increased profit of £7.5m, with earnings of 1.2p.
Going forward, they already estimate that 2026 will show £60.3m in revenues and £8.6m in profits, worth 1.4p per share in earnings.
In My View
Based upon the broker estimates it does look as though EKF’s reorganisation process is capable of showing some early benefits to the bottom line.
Although the shares are trading at a fairly high price-to-earnings ratio, I consider that they will rise from the current 28p to trade around the 35p level within the next few months.