The Novacyt (LSE: NCYT) share price is up 13% at 341p, as I write, after the company saw its revenues rise strongly during the first half of the year.
Despite today’s gains, the Covid-19-testing specialist’s shares are down by 60% so far this year, due to concerns about future demand and a potentially expensive dispute with the NHS.
That slump means the shares are now up by just 15% from a year ago. But if the company can get back on track I think Novacyt shares could be cheap at the moment. Should I consider buying this stock ahead of a potential recovery?
Back on track?
Novacyt’s group revenue rose by 50% to £94.7m during the first half of the year, compared to the first half of 2020.
There’s good and bad news here. The good news is that non-DHSC (NHS) sales rose by 20% to £54m during H1. This growth is being driven by private demand for Covid-19 testing from companies testing their own staff. I suspect this growth is why Novacyt’s share price is rising today.
Looking ahead, management expect to report sales of around £100m for the full year, excluding NHS revenue. That would be a 64% fall from sales of £277m in 2020.
However, the dispute with the NHS is a serious concern, in my view. The company says £41m of 2021 revenue is under dispute and unpaid. In addition, around £24m of NHS invoices from 2020 are unpaid.
If the dispute goes against Novacyt, I think the company could face significant cash costs.
Missing information?
When companies issue trading updates, they usually put a positive spin on things. Sometimes, management excludes certain pieces of information. I think that may be the case with today’s update.
In my view, there are a couple of things missing. The first is that there’s no mention of any non-Covid products. Most of Novacyt’s previous updates have included some information on the company’s future plans.
The second piece of information I’d like to have seen is an update on the group’s cash position at the end of the half year. In June, the company said cash at the end of 2020 was £91.8m. That was eight months ago. I suspect that that balance has fallen sharply since then, but that’s only guesswork.
Novacyt share price: would I buy?
Based on management guidance for sales of £100m in 2021, my sums suggest that at a price of 337p, Novacyt shares could be trading on around seven times forecast earnings. I might normally be tempted at this level but, for me, there’s just too much uncertainty:
- We don’t know how quickly Covid-19 demand will fall.
- Novacyt’s dispute with the NHS could be expensive to resolve and result in a loss of future sales.
- It’s not yet clear to me whether Novacyt will successfully develop or acquire any non-Covid products.
To add to the uncertainty, long-time chief executive Graham Mullis is retiring later this year. He’ll be replaced by external hire David Allmond in October.
My feeling is that Novacyt is likely to face continued challenges over the next year. Unless things go very well, I expect further falls in revenue and profits — and the share price.
For this reason, I won’t be buying Novacyt today.
