This ‘special situation’ stock looks set to fly

An interesting development could drive investor returns with this stock.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

sdf

Medical diagnostics specialist EKF Diagnostics Holdings (EKF) released full-year results today that show a blistering turnaround in financial fortunes.

Out of the red and into the black

Headline figures include a surge in revenue of 28% compared to 2015’s outcome,  with gross profit rising by 24%, and adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) of £6.1m, which trounces the loss of £0.3m suffered the year before.

This stellar performance shows in cash from operations, too, with the firm delivering an inflow of £8.8m, which compares to an outflow of cash during 2015 of £2.9m.  On 31 December, cash on the balance sheet had grown 300% for the year and stood around £7.9m, translating to net cash of £2.2m — a vast improvement on the net debt figure edging towards £9m we saw a year ago.

By most measures, this is a good financial performance that marks a turnaround in the firm’s fortunes into profitability. The shares have responded well, soaring more than 130% since February 2016. However, I think there could be much more to come for investors because the firm also announced today that it is evaluating plans to split the company into two separate entities, with the aim of achieving a fair reflection of the value of each separate business.

The parts could be under-valued

EKF Diagnostics describes itself as “a global medical diagnostics business with a long history in point-of-care testing and central laboratory manufacturing“. The firm makes HbA1c analysers and glucose analysers used by doctors, sports clinics and diabetes clinics, and distributes them to more than 100 countries.

The directors put today’s positive results down to a restructuring programme aimed at driving profitability and organic sales growth. Non-executive Chairman Christopher Mills reckons the firm moved fast to turn things around and predicts “continuing benefits” for shareholders during 2017.

I think the business separation idea is interesting, and demonstrates that the directors are focused on investor returns as much as they are on turning around and growing the business. The separation would divide the business based on the existing departments of Point of Care and Lab Diagnostics. The directors believe that the parts of the business are worth more than the firm’s overall valuation implies and separating them into stand-alone firms would give the opportunity for valuations to adjust in a way that may add to investor total returns.

Slight complications?

Around 39% of sales came from the US during 2016 and that leads to a challenge regarding tax implications surrounding the proposed split. To overcome this problem the directors plan to cancel the company’s shares from trading on AIM, followed by the pursuit a listing of the shares of both companies on a “market to be determined.”

Recognising that a period of being unlisted on a stock exchange could be uncomfortable for shareholders the directors are considering offering a 21.5p-per-share buyback prior to splitting the business for those who would rather exit their holdings than go through the changes.

With the share price sitting around 19.25p as I write, there’s a potential 2.25p immediate upside to get to the directors’ implied valuation, which, on top of the ongoing turnaround and growth trajectory of the business, adds to the attraction of the stock, in my view.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Close-up of a woman holding modern polymer ten, twenty and fifty pound notes.
Growth Shares

This FTSE 250 stock has beaten the index by around 10x over the last year

Jon Smith rates a FTSE 250 stock that has smashed the broader index performance and could keep going based on…

Read more »

Young woman working at modern office. Technical price graph and indicator, red and green candlestick chart and stock trading computer screen background.
Investing Articles

B&M shares are at record lows! Is now the time to consider buying?

The retailer, demoted from the FTSE 100 to the FTSE 250 last year, continues to struggle. But are B&M shares…

Read more »

Investing For Beginners

2 reasons why the stock market could hit 10,000 points by December

Jon Smith explains how the makeup of the UK stock market and the current valuation could support a move towards…

Read more »

Queen Street, one of Cardiff's main shopping streets, busy with Saturday shoppers.
Investing Articles

Why this FTSE 100 rocket is this investment trust’s number 1 holding

A UK investment trust is certainly going against the grain by having this FTSE 100 share as a high-conviction holding…

Read more »

UK financial background: share prices and stock graph overlaid on an image of the Union Jack
Investing Articles

These 2 FTSE growth stocks jumped 8% and 4.5% today!

Ben McPoland takes a closer look at a pair of FTSE stocks that are performing really well recently. Why are…

Read more »

Road 2025 to 2032 new year direction concept
Investing Articles

This under‑the‑radar FTSE 100 growth stock is also a secret dividend superstar!

Harvey Jones belatedly wakes up to a brilliant FTSE 100 growth stock that has an equally remarkable track record of…

Read more »

Business manager working at a pub doing the accountancy and some paperwork using a laptop computer
Investing Articles

Barratt Redrow share price plunges 9% on profits hit – time to consider buying?

Harvey Jones says FTSE 100 housebuilders continue to suffer with the Barratt Redrow share price slumping on a profit warning.…

Read more »

UK financial background: share prices and stock graph overlaid on an image of the Union Jack
Growth Shares

Why the next month could make or break the Lloyds share price

Jon Smith outlines two key events in coming weeks that could influence the Lloyds share price, leading him to make…

Read more »