Bioventix plc - EPS up 28%. Dividend up 65%. UPDATE

This article has been updated to include matters discussed at the Conpany's presentation to investors and analysts in early May.

Introduction

Bioventix ($BVXP), the specialist developer and supplier of high affinity monoclonal sheep antibodies for applications in viral clinical diagnostics, has delivered another set of robust trading numbers covering the six months ended December 31st, 2013. In January 2014, I wrote an article about Bioventix which described the business in some detail. You can find the article here. I also referred to Bioventix in my article "One Way to Become an ISA Millionaire" which you can find here. 

Review of the Interims

• Sales rose 28% to £1.51m (2012/13 H1: £1.18m) whilst operating profits increased by 31% to £956k (2012/13 H1: £736.6k).
• Operating margins continued to strengthen to 63.3% up 164 basis points over the same period last year.
• Earnings per share increased by 28% to 16.03p (2012/13 H1: 12.54p).
• The Company has decided to raise its pay-out ratio from around 45% to 60% of earnings.
• Consequently, Bioventix's interim dividend per share is up a thumping 65% to 9.6p.

 

Cash Conversion

The Company generated Free Cash Flow of £730.3k in H1 2012/13, up 46% over the corresponding period in the previous year. This strong cash performance means that 90% of the Company's earnings in the period converted to cash, an improvement on the 86% average in the period 2007/08 to 2012/13. Capex requirements are modest, so the only reason why cash conversion is not 100% is the increase in trade receiveables caused by rising royalty sales.   

The Company had net cash of £2.88m at December 31st, up over £500k from a year ago. 

Capital Efficiency

The Company has continued to employ capital effciently in the business as evidenced by the 39.4%  Return on Total Tangible Assets ("ROTA") in the period (2012/13 H1: 38.4%) and the 35.2% Return on Equity (2012/13 H1: 34.9%). Stripping out the cash on the balance sheet pushes the ROTA up to a staggering 97%.

Vitamin D, Troponin & Other Analytes

The Company has eight Sheep Monoclonal Antibodies ("SMAs") which it developed at its own risk and on which it earns royalties. The most important of these is the Vitamin D analyte. The Company has now licensed its Vitamin D analyte to thirteen diagnostic companies worldwide.

In the key US market only three diagnostic companies have so far come to market with a test based on Bioventix's SMA. These include Johnson & Johnson and Diazyme Laboratories (part of General Automatic). I understand Diazyme is particularly confident about its test which can be used on a wide variety of machines.

A big three diagnostic firm is believed to be launching a sheep based VItamin D test in October or November 2014. A review of the FDA database suggests the new entrant will be Abbott Laboratories as both Siemens and Roche already have a Vitamin D mouse based assays in the market.

The recently annouced patent challenge relates to the European market. The patent secured by DiaSource could  have a negative impact on all Vitamin D assays and not just those based on sheep antibodies. As a result, many of the diagnostic companies with a Vitamin D test are likely to be joining Bioventix in opposing the patent. Bioventix et al believe the patent should not have been granted as it is too broad and is not sufficently novel. Bioventix and the other companies effected have until Autumn to lodge their opposition to the patent. There are three possible outcomes, the patent is maintained in granted form, the patent is modfied or it is revoked. It could take between one and five years for this patent dispute to resolved. 

It would seem likely that diagnostic companies already in the market with a Vitamin D assay (whether mouse, rabbit or sheep) will continue to sell their tests and those coming to market will continue with their plans. The onus will then be on DiaSource to seek injunctions which they may wish to avoid given they will be up against deep pocketed opposition. Courts may be reluctant to grant an injunction given the likely strong opposition to the original patent grant. 

Bioventix created and licensed three new SMA's in 2012 covering Androstenedione, TSH & T4 which will eventually come to market. In the current year it is working on an estriol, BNP and PTH analyte. 

The Company has also developed eight SMAs under contract with specfic diagnostic companies. The Troponin SMA is the most important of these. The partnering diagnostic company is one of the top five diagnostic companies in the world and they should be coming to market with a test in 2016. Tacrolimus and Aldosterone SMA based assays came to market at the end of 2013. The Company developed three SMAs for specific partners in 2013, including one which will be used in a test linked to a theraputic drug. 

Research continues to constitute the majority of the Company's expenditure which is all expensed.

The seeds of tomorrow's annuity revenues are being sown right now. 

EPS Forecasts and Valuation

In January, I wrote that house broker finnCap was assuming only a modest increase of 3.2% in EPS to 32.2p for the full year. I thought this forecast too conservative and suggested an EPS target of 35p (adjusted to exclude the costs of moving to AIM).

The Company's strong performance in H1, suggests finnCap's forecast will be beaten. Bioventix only needs to match its H2 EPS from 2012/13 at 17.74p, to produce EPS for the full year of 33.8p. It would not be unreasonable, however, to assume growth in the second half of the year at least matching the growth rate in the first six months of the year, suggesting H2 EPS could hit 22.7p bringing total EPS for 2013/14 to 38.7p.

EDIT: finnCap issued a revised note on May 6th 2014 marginally increasing its EPS forecast for 2013/14 to 32.7p, making my revised forecast look a tad over-optimistic! I still believe finnCap's forecasts are too conservative and reflect the difficulty management and corporate broker's have in estimating the Company's future royalty revenues. The Company has to wait for up to three months after its two period ends to learn how much royalty it can book for the period from each licencee.    

In the current year much will depend on whether more SMA based Vitamin D tests are released onto the market and the extent to which these tests and those already in the market win out against rival but less senstive mouse based assays.    

In my previous article, I said that finnCap were forecasting EPS of 37.7p for 2014/15 compared to my forecast of 40p. Given the current growth trajectory I have revised my EPS forecast for next year and believe it could be as high as 45p.

On a 60% pay-out ratio and assuming my EPS forecasts are reasonable, dividends per share could be 23.2p in the current year rising to 27p next year.

Based on the current offer price of £6.20, my estimates value the Company on a PE multiple of 16.0x for the current year falling to just 13.7x next year. The shares offer a prospective dividend yield of 3.74% for the current year rising to 4.35% next year.

AIM Listing

In my January note, I speculated that Bioventix might seek an AIM listing in 2014. This was confirmed in April and the shares were admitted to trading on AIM on April 29th, 2014. The AIM listing increased the number of market makers prepared to quote Bioventix's shares from one to three. This has improved liquidity and reduced the wide bid-offer spread from £5.00 - £6.00 previously to £5.75 - £6.20 now. I believe there is strong pent up demand for the shares as evidenced by two large trades for almost 250k shares booked in recent days which may have seen more institutional investors join the register.

Conclusion

Bioventix remains one of my key investments and still offers considerable upside potential. The 65% proposed increase in the dividend and the high 60% pay-out ratio bears testament to this Company's ability to generate cash and outstanding returns on capital and equity. The listing on AIM will hopefully bring Bioventix to the attention of a wider audience.