It’s been a rough almost-half-year for the Novacyt (LSE:NCYT) share price. Despite surging throughout 2020, and the early part of 2021, the stock crashed in April and has continued trending downward. But just last month, it popped back up again and managed to shift the 12-month performance to around +24%.
It’s still nowhere close to where it was at the start of the year. But could the recent jump be an indicator that the firm’s woes are over? And should I be considering this business for my portfolio?
NCYT share price jumps on earnings
Last month, Novacyt published its six-month performance report. And at first glance, it was pretty impressive. The diagnostics specialist brought in £94.7m in revenue. That’s about 50% higher than in 2020, so I can see why the market reacted positively to the news. However, on closer inspection, this trading update may not be as fantastic as it seems.
I’ve previously explored what triggered the NCYT share price to crash in April. But as a quick reminder, the firm’s biggest source of income is a single contract with the Department of Health and Social Care (DHSC). Under this agreement, Novacyt supplies the NHS with Covid-19 testing kits. And it has proven to be a very lucrative deal, which was behind the stock’s surge last year.
Unfortunately, this contract was not extended as originally anticipated. And overnight, the vast majority of the firm’s revenue stream evaporated. Of the £94.7m reported as revenue this year, £40.8m originates from the DHSC and is currently in dispute. In other words, it remains unpaid.
It’s not all bad news
A more honest picture of the group’s performance can be seen by its non-DHSC income. This came in at around £53.9m, up around 20% versus last year. That’s still a good level of growth, and it seems it will continue throughout the rest of 2021. Why? Because Novacyt has managed to acquire several new contracts.
Firstly, its subsidiary, Primerdesign, has signed a new deal with the DHSC worth £4.7m, which runs until March 2022. The management team has also negotiated an extension with UNICEF to keep supplying Covid-19 tests until July 2022. Meanwhile, testing in the private sector continues to see high demand for Novacyt products, especially its latest generation of testing kits that can detect the key variants of Covid-19.
Consequently, management has posted a revenue forecast for the year of £100m, excluding income from its disputed DHSC contract. And compared to non-DHSC income last year, this is a notable increase. If the company can continue to grow moving forward, the NCYT share price could recover over the long term.
The bottom line
It’s encouraging to see the group’s revenue stream start to recover the recently-lost income. And, more importantly, diversify its revenue sources. However, one glaring issue I spotted in this latest update is the lack of information surrounding how the business will thrive in a post-pandemic world.
Currently, almost all sales are generated by Covid-related products. But the demand for these will naturally start declining as the pandemic comes to an end. Therefore, until management can answer how it plans to continue growing over the long term, I’ll be keeping this business on my watchlist.
Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.