Should I buy Novacyt shares at under 400p?

The Novacyt share price is rising today, but 45% of the company’s 2020 sales are under dispute. Can the company stage a post-Covid recovery?

| 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.

Novacyt (LSE: NCYT) shares are up nearly 10%, as I write. The Covid-19 testing specialist said its sales rose by 230% to £277.2m in 2020. Novacyt’s share price has risen by 60% over the last year, but the stock remains nearly 70% below January’s high of 1,190p.

The stock has slumped as the outlook for the business has become increasingly uncertain. The company is involved in a legal dispute with the NHS that relates to 45% of last year’s sales. Novacyt also faces a tougher market outlook, with demand for Covid-19 testing falling.

A record-breaking year

Novacyt had an incredible year in 2020. The company generated a pre-tax profit of £132.4m on sales of £277.2m. This growth was driven by the company’s role as one of the main suppliers of Covid-19 PCR testing kits to the Department for Health and Social Care.

It was a profitable business — Novacyt’s operating profit margin hit 60% in 2020. The company was able to repay all of its debts and ended the year with net cash of £91.8m.

Unfortunately, this strong performance has been spoilt by a messy dispute with the NHS .

Bad news for shareholders

Investing in companies that are involved in legal disputes can be risky, as the eventual outcome is often unpredictable. I’m worried about the potential impact of the NHS on Novacyt shares.

The firm’s share price crashed in April when the company first revealed this problem. Details are scarce, but today’s results did include an update on this situation.

The 2020 revenue affected by the dispute is £129.1m. From what I can understand, the NHS is asking for a refund. However, Novacyt is hoping to be able to settle the case by replacing some products under warranty. The company reckons this might cost “a maximum of £19.8m.”

To make matters worse, this dispute is now affecting product sales in 2021. Novacyt says invoices for £49m of product delivered to the NHS this year remain unpaid.

I don’t like this situation at all. The only good thing I can see is that Novacyt’s £92m net cash balance gives the firm some breathing space. However, I suspect that much of this cash will be needed to resolve this legal claim.

Novacyt shares rely on growth hopes

However, I can see two reasons to be optimistic about the outlook for Novacyt shares. Firstly, I think the stock may still be cheap. The latest management guidance is for sales of £100m in 2021, excluding the disputed NHS sales. CEO Graham Mullis expects to be able to maintain a gross profit margin of 70% on these sales.

My sums suggest this values the stock at around 10 times 2021 forecast earnings. That seems reasonable to me.

The other reason for optimism is that Novacyt is continuing to develop new non-Covid products for the “respiratory, transplant and infection disease markets.” Success here could help to offset a continued decline in Covid-19 testing.

Would I buy Novacyt shares at under 400p today? Personally, no. The combination of legal risks and the firm’s dependency on Covid-19 testing makes it too risky for me. Although the shares could recover well, I think a gradual decline is more likely.

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.

Roland Head 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.

More on Investing Articles

Passive income text with pin graph chart on business table
Investing Articles

Yields of up to 7%! I’d consider boosting my income with these FTSE dividend stocks

The London market has some decent-looking dividend stocks right now, and I’m tempted by these two for growing income streams.

Read more »

Young mixed-race couple sat on the beach looking out over the sea
Investing Articles

I’d put £20K in an ISA now to target a £1,900 monthly second income in future!

Christopher Ruane shares why he thinks a long-term approach to investing and careful selection of shares could help him build…

Read more »

Mature couple at the beach
Investing Articles

6 stocks that Fools have been buying!

Our Foolish freelancers are putting their money where their mouths are and buying these stocks in recent weeks.

Read more »

Black woman using loudspeaker to be heard
Investing Articles

I was right about the Barclays share price! Here’s what I think happens next

Jon Smith explains why he still feels the Barclays share price is undervalued and flags up why updates on its…

Read more »

Investing Articles

Where I’d start investing £8,000 in April 2024

Writer Ben McPoland highlights two areas of the stock market that he would target if he were to start investing…

Read more »

View of Tower Bridge in Autumn
Investing Articles

Ahead of the ISA deadline, here are 3 FTSE 100 stocks I’d consider

Jon Smith notes down some FTSE 100 stocks in sectors ranging from property to retail that he thinks could offer…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

Why I think Rolls-Royce shares will pay a dividend in 2024

Stephen Wright thinks Rolls-Royce shares are about to pay a dividend again. But he isn’t convinced this is something investors…

Read more »

Investing Articles

1 of the best UK shares to consider buying in April

Higher gold prices and a falling share price have put this FTSE 250 stock on Stephen Wright's list of UK…

Read more »