As Omega Diagnostics Group plc & Roxi Petroleum plc Rally, Should You Sell Or Buy?

Omega Diagnostics (LSE: ODX) is up 10% today on the back of positive news for Visitect CD4, a testing kit at a development stage that is now more likely to deliver on its promises — meanwhile, confidence was also boosted by encouraging progress on allergy development. 

Similarly, Roxi Petroleum (LSE: RXP) is roaring back in early trade, with its shares gaining almost 20% of value. Of the two, I’d probably choose the Kazakhstan-based oil and gas explorer if I were to add a high-risk, high-reward stock to my portfolio. Here’s why. 

Omega Diagnostics 

Omega announced today that it had tested its devices “on a large number of patient samples with the aim of optimising performance and deciding on suitable in-house manufacturing processes,” adding that it has now made three pilot batches of devices, “all of which have yielded comparable results and which demonstrate that Visitect CD4 is capable of meeting the company’s performance design goals in comparison to flow cytometry when tested on HIV positive patients.”

Although Omega remains “very confident of the prospective commercial success of Visitect CD4,” what this means is that it remains unclear whether Visitect CD4 will ever generate any revenues.

In October last year, management warned that annual results would disappoint investors due to manufacturing problems with its benchmark HIV test kit, news of which pushed the stock down to 16p from about 19p in a single trading session. Now the shares trade at about 24p, but key to value creation is the commercialisation of Visitect CD4, which may or may not make it to the market this year or next. 

While Omega said that its “internal investigation phase is now complete as planned,” its stock remains highly illiquid, and value investors may need more concrete news to budge. Its market cap is only £24m, which implies net earnings multiples of 27x and 24x for 2015 and 2016, respectively. Also based on trading multiples for forward sales, the stock is not incredibly expensive, true — but a strong sterling could hurt profits over the next 24 months.


Today’s operational update is important for two reasons. 

Firstly, it shows that Roxi has options, as it fetches more cash than it had hoped from the sale of the Galaz contract area in Kazakhstan. The acquirer is a consortium led by Xinjiang Zhundong Petroleum Technology, which will pay up following an increase in the price of brent crude — “the aggregate consideration will be $100m and Roxi’s effective consideration has increased to $23m,” from $20m, which is not small change for a company with negative operating cash flow and normalised capex above $10m annually. The funds from the Galaz disposal will be used to fund the development of its flagship BNG assets. 

Secondly, “in April 2015, Roxi announced the agreement to issue new shares at an effective price of 18p per shares to BOCO (…) to raise $20m,” but in light of “the imminent completion of the sale of Galaz and difficulties in receiving timely payment, Roxi has informed BOCO it is not continuing  with this subscription and has terminated discussions with them.”

Good news on this front, too. With a market cap of £122m, Roxi trades around 16.3p a share, some 36 % below its 52-week high of 25.5p as of 1 September 2014. It’s a bet worth taking, I’d argue. 

If you are after high returns and a more acceptable level of risk for a bigger company in the £200-£300m market cap range, I suggest you consider an outstanding value play that is outperforming the FTSE by almost 2% today. 

This small cap is less cyclical than Omega, and has already proven it can deliver plenty of value to its shareholders with a stellar performance in recent times. Moreover, it's less risky than Roxi, and could easily raise additional funds to expand more quickly than many analysts would expect. Finally, its trading multiples point to upside in the region of 50%. 

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Alessandro Pasetti 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.