GMF78 – I’ve kept fairly quiet on Novacyt last few months, not because I don’t believe in the company (still invested) but because I am utterly convinced the DHSC dispute resolution is undermining the share price and investor sentiment. When that gets resolved it makes sense to see more activity from the company. That said, the following article was sent to me for review and I asked permission to publish, so a wider audience can see it too. There are a few ideas within this piece that the company would do well to consider.
Novacyt Critical Assessment of Investor Relations
I’m taking the time to write this as although I am a continued supportive long-term holder of Novacyt, and intend to keep it that way, I feel a critical assessment of the current scenario is due in order for constructive feedback to (hopefully) make it’s way to the management.
There’s no sugar coating that the company has faced a fair few issues this year:
- Dispute with the DHSC
- Delays to LFT approvals
- Write down of inventory
- CDTA delays (industry wide issue)
Although these issues obviously have a justified negative influence on the share price, the hit to the company valuation in my opinion has been disproportionate to the news, especially when weighed against the positives that are known from e.g. the interims:
- £77m cash position, negatives factored in
- £100m FY revenue guidance for 2021 excluding DHSC
- New £4.7m contract for Promate with DHSC
- Expansion in US underway
- Including Tax rebates + H2 revenue, potentially over £100m cash by year end (less any investments made before then)
- Genesig is the second most used manual PCR test used by UNICEF
Also, although unfortunately not a positive for global healthcare, the fact that the pandemic is still very much in full swing and testing is still a very large part of every day life also means the company is still able to take advantage with it’s portfolio of Covid testing products which has yielded the revenue to date.
To paint a picture of how badly the company valuation has been hit, if you bought Novacyt just 1 week into the first UK lockdown (30th March 2020) as a long-term investors (buy and hold, no trading) you would only be up 13.3%.
At that date though, the financial position as per the 2019 results:
- Company had €1.8m cash
- EBITDA €0.2m
- Revenue €13m
- Borrowings of €11m
Kind of feels like the developments over the 18 months since then are perhaps worth a little for than a mere 13%? That is just £19m added to the MCap.
In relative terms, going off expected FY21 results:
- Cash position increased by 6500%
- EBITDA increased by 21000%
- Revenue increased by 900%
- Borrowings erased fully
And this is ignoring DHSC revenue for the year, and that cash position will get a significant boost on positive outcome of the dispute.
So what is the issue that is amplifying the poor sentiment in the company? My verdict is the way the company deals with Investor relations and communications.
I was at first critical of those that said the communication was poor. I used to argue for the side of “They have told us how great the financials are, what more should the market need?”
What initially led me to change my viewpoint was playing around with some graphs and made the following. It is neither volume or price, but rather the product of the two – the monetary value of Novacyt shares traded daily (combined NCYT and ALNOV). I have however applied a 10D moving average to smooth it out a little.
As you can see, the interest in Novacyt is at all-time lows throughout the pandemic. A couple of bumps on the way down but the cash flow around Novacyt is just not there.
There is an argument that “the share price is lower so of course total value is lower, duh”, and although I feel that is applicable to certain cases – to Novacyt I believe it isn’t. In shares forming part of an index, weighting plays a heavy part in the trades IIs make and as such I expect the total value traded to be influenced by the share price heavily. But we know the overwhelming majority of Novacyt holders are PIs, who generally have a set sum of cash to invest rather than a set weighting to hit. If the share price halves? That just means they get more shares for their money.
Also when we were last at an equivalent share price, the traded volume was 5 times higher than it is today.
So to me, the above graph kind of tells me Novacyt isn’t so much the beaten up share – it’s either the forgotten share, or the share people simply don’t want to touch.
“But surely this can also mean that it’s just because everyone is holding and not selling, waiting for dispute outcome” I hear you say. And you’d be right, but it also shows there are no buyers. If there were lots of buyers and no one was willing to sell, the natural unfolding of events would be the price keeps rising to a point where the two are matched. Also, it’s not hard to see why no one is selling as no one that bought and held since April 2020 is in profit, and no one that bought even as a trade since the end of January 2021 is in profit.
In terms of “creating shareholder value”, we are now at the point where absolutely none has been created throughout the entire pandemic as it’s all been reversed. Let me be clear though, the company itself has created an astounding amount of value hence they’ll soon be breaking a £100m cash figure, but this is failing to translate into shareholder value.
Looking at the Investor Relations
Here is a chronological look at how news releases have unfolded YTD:
29th Jan – 2020 trading update, company states they are in active discussions to extend the DHSC contract
2nd Feb – Launch of SNPsig
24th Feb – R&D update, announces Covid HT, and next gen Antibody LFT due to launch in Q2
17th March – Launch of Versalab
24th March – Expansion of SNPsig
9th April – Trading Update, DHSC are disputing H2 revenue but on a positive note lots of new DHSC revenue from Q1 and the company are confident they will win the dispute. But also, the DHSC likely doesn’t need any more PROmate
23rd April – R&D update, Antigen LFT expected end of Q2. Genesig, Promate, SNPsig all levelled up and the company announces it’s inclusion in Microbiology Framework. But also the Next gen Antibody LFT previously announced has been kicked to Q3
4th May – UNICEF 1m test Donation.
17th May – SNPsig included in a framework
21st May – Dispute update. No progress but it now inexplicably includes Q1 revenues
22nd June – 2020 results + update on strategy
29th June – Antigen LFT launched, self test version stated as coming “shortly”
6th July – Guillermo buys shares
29th July – New CEO announced
18th August – Half year update, new £4.7m Promate contract awarded, deal with Excalibur announced, £100m rev guidance, 2 year WHO deal, 1 year UNICEF deal extension
18th August – Investor presentation, reiterates strategy given in June (but no additional action discussed)
16th Sept – DHSC dispute update, will now not recognise revenue and writing down significant amounts inventory
27th Sept – Unaudited HY results, poor EBITDA and Revenue numbers due to 16th September implementations
30th Sept – R&D update, New Winterplex launched and new Co prep machine launching in 1 month. But also, the LFTs are now super late
2nd Nov – Industry wide CDTA issues
Some of the trends I see
- Overwhelmingly large RNSs sometimes, full of info more suited in lab sales brochures
- The good news is often paired with bad news which completely distracts from any positives
- Many of the bad news examples are from the company themselves over promising and under delivering on timelines. First the DHSC extension, then the next gen LFT, then the Antigen LFT for self test, and now Co-Prep. Co-prep is particularly bad as it was claimed it would be launched with a one-month outlook, yet now appears delayed. Surely that close to launch, more precise time scales should be known
- When negative news is released, there is never an attempt to look for silver linings or spend a few words explaining how the impact in the company isn’t necessarily concerning.
Example 1: Non recognition of H1 DHSC revenue massively hurts the image of the company on investor stock comparison sites such as Morningstar making the company look like it’s fallen off a cliff and is loss making when it’s not. Why not explain the benefits of this to shareholders?
Example 2: When announcing the CDTA issues the company could have mentioned that government contracts are exempt from CDTA and as such £4.7m contract is unaffected. Also if the view is that this will be a very short term issue, why mention the impact for a 2 month outlook?
- Inconsistency in what is released. Many R&D updates, but then some arguably more important products not even mentioned (e.g. new multigene HT tests)
- Strategy first laid out nearly 5 months ago, and reiterated word for word in August and then at AGM. How long till strategy is actioned though?
- David? Sorry never heard of him.
One thing I hope the company realise is the only additional media coverage that the company gets is from publications that just scrape daily released RNS and rewrite for a short story. The latest articles are all headlined “Novacyt issues profit warning and pulls product” as a direct consequence of the choice of wording.
Perhaps better worded RNS would lead to better articles. And then on RNSs where its a mixed bag of good and bad news, it’s of course not the good news that gives any headlines:
“Novacyt announces delays to LFTs”
And when exclusively good news is announced? Nothing. And that’s when the companies in house press team should be getting in touch with publications through issuing of Press releases. And they should also be contacting the publication’s picking up bad news. Just additions along the following could have huge impacts:
“Novacyt Press officer comments to Reuters on the CDTA matter, that the whole industry is affected and they together with commercial partners are working to resolve the bottlenecks encountered at the UKHSA”
The company needs to understand that when trading as a public company, they need to not only market their products to their clients but also market themselves as a good investment to potential buyers and they are failing at this.
If anything, the AGM should have shown just how supportive and active current shareholders are. To get 21% voter turnout on AIM/Euronext from pretty much exclusively PIs is quite impressive despite what some may think (have a look at some other AIM companies that don’t have large II/Director holdings)
Yes, they have tried to improve communications with for example the Investor Presentation but it’s not existing investors that need to be convinced, it’s new ones both private and institutional that need to be targeted.
As a current holder, it appears the company is doing nothing to market themselves as a good investment.
A new CEO joining the company would have been a perfect opportunity to get some press rounds in, get on the usual AIM investor podcasts and Youtube channels just by way of introduction of David Allmond. The best thing is he’s done them before for Amryt so knows exactly what they’re looking for in terms of answers and how to present himself. And it’s not like it’s not all pre-scripted and he has to know the companies articles of association off by heart, the Marketing team will have prepared the answers for him to deliver it’s PR 101.
But instead, it’s more silence, the same silence that I believe is a strong factor behind the fall to this early pandemic level. Again to reiterate, it is not RNS’s count in general that is the issue. The kind of communication required should perhaps not even be coming by way of RNS, however the tone of those that do come does need to be evaluated.
The directors can hide behind a certain justification of “the share price doesn’t influence daily business and we don’t control the market”, but when they appeal for shareholder support for the level of dilutive powers they asked for at the EGM, citing its requirement to grow the business, this becomes a direct contradiction. For the company to maximise the value of these resolutions, they need to to improve the performance of the underlying asset – their own share price.
They are correct in that they don’t control the market, but it’s time the Directors start a proper campaign to show why Novacyt is a good investment both now and in its post covid strategy. Currently, I can’t even be sure they feel it is themselves.