At least someone’s having a good time in this pandemic! Whilst most businesses have been hit hard by coronavirus – with countless shops and restaurants closing – a few have thrived. Novacyt (LSE:NCYT) is a biotech company currently producing testing kits for the UK government. As of the end of 2019, the Novacyt share price was 12p. But since rising over 2,500% to almost 500p, the shares are trading around 340p at the time of writing. It seems the company has had new life breathed into it by the huge contracts the pandemic has provided, signing an agreement with some big names in the biotech sector. But does the stock have enough long-term investment merits to warrant investing your cash in?
Putting the Novacyt share price under the microscope
Last year Novacyt reported a loss of £6.5m and earnings per share of -0.12p. That’s not a brilliant start. Obviously, without earnings, the shares do not pay a dividend. Cash flow before financing is also in red territory. The debt ratio has tripled from FY2018 to 2019 and debt to equity is up by 150%. And just to put the boot in, revenues have declined year on year since 2017. From first inspection, Novacyt looks like a company increasingly relying on outside financing to sustain slowly declining sales. But all that data is from the past – when the Novacyt share price was at 12p. Investors have become a lot more excited since then. Let’s see why.
Never let a crisis go to waste
Much of the investor interest stems from Novacyt’s ongoing work on a fast-turnaround testing solution for Covid-19. Called a CE-Mark test, it is designed to allow non-clinical staff to apply fast tests to suspected cases. Additionally, its PCR tests are used to detect antigens, which can determine whether someone has the virus or not. The company quickly established the need to develop significant manufacturing capacity, and today has eight dedicated manufacturing sites capable of producing Covid-19 tests at an output rate of more than 10 million tests per month, which Novacyt expects to achieve from June onwards.
The Directors believe the significant demand for the Company’s Covid-19 test will continue through to the end of the year, and may extend well into 2021, as the global demand for Covid-19 testing continues to increase. Another hope is that the global contacts and networks that will be created during the pandemic will provide access to wider markets for other products in the future. If the company can become consistently profitable, the Novacyt share price could keep climbing.
Looking to the future…
Savvy investors will want to know how Novacyt will continue to make money once the pandemic finally fades into the background. The Directors’ belief that mass Covid-19 testing will continue until 2021 still leaves open the question: what next? Indeed, the demand will fall away at some point. Perhaps when we see a vaccine for Covid-19. The company states that its customer base has significantly increased around the world, and cash has risen from €1.8m as of 31 December 2019 to €9.2m at the end of April. The company has never looked in a healthier position than it does now. It’s no wonder that the Novacyt share price has risen so dramatically! The question is whether they can translate good fortune into a viable business future. If so, Novacyt could represent a good investment.
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Toby Aston does not own shares in any of the companies 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.