Given the immense complexity of the human body, have you ever wondered how hospitals can match donated organs with suitable patients? Tepnel Life has the answer.
Tepnel Life Sciences (Aim: TED)
It is a niche healthcare group that has developed some clever technology (called LifeMatch), which permits doctors to perform up to 100 tests simultaneously on a single human tissue sample to ensure that both donor and intended recipient are compatible. But unlike some of its biotech peers, Tepnel is not an under-funded, one-trick pony. As well as being profitable and cash-generative, it also provides diagnostic tests for foetal distress, such as for Down’s Syndrome during pregnancy and cystic fibrosis in newborns. Its contract research unit also offers outsourcing services, including DNA extraction, food testing and immunology to big pharma groups (including AstraZeneca and GlaxoSmithKline).
These are high-value, science-rich activities, backed up with proprietary expertise that is proving a hit. At the interims in July, revenue jumped 34% while net cash improved by £0.9m to £1.8m. More of the same is predicted for the second half; house broker Seymour Pierce expects 2008 sales and earnings per share of £22m and 0.95p respectively, rising to £26m and 1.55p in 2009. Admittedly, the firm doesn’t pay any tax just now due to its £20m plus of carried forward losses, but even so, at 11p, it trades on a normalised 9.5 times next year’s earnings.
I would value Tepnel on a 2009 operating profit multiple of ten, discounted back at 12%. This generates an intrinsic worth of about 16p a share, offering 45% upside on today’s level. The group derives nearly 70% of its turnover from abroad, so should benefit from devaluation in the pound. With the shares denominated in sterling, they are now even better value for potential overseas buyers within the diagnostics industry. Before tucking in, one must recognise the risks. Tepnel is still a small business and may need fresh capital at some stage to support its aggressive growth plans. Its shares also tend to be thinly traded, and there is a chance its technology may be superseded by better products in future. That said, its core markets seem robust – despite some negative news flow – so I rate the shares a buy for adventurous investors.
Recommendation: speculative BUY at 11p (market cap £26m)
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments.