Britain’s hospitals have become hotbeds for infectious diseases. Each year hospital-acquired infections such as MRSA and Clostridium difficile affect around 300,000 patients and cause nearly 5,000 deaths. It’s even worse in America, where nasty bugs like these are estimated to be one of the top ten killers, claiming close to 100,000 lives annually. Unfortunately, things aren’t getting any easier for hospitals either. More and more viruses are developing immunity to existing antibiotics. Meanwhile, more and more people are travelling to exotic locations and bringing back dangerous diseases.
This is where Bioquell fits in. Its bread-and-butter (67% of turnover) is supplying patented decontamination kit (based on hydrogen peroxide) to the healthcare, life science and defence sectors.
The equipment supplied in the kit literally kills all known germs dead. The division expanded 13% in the first half of the year with about 75% of sales generated from overseas. Furthermore, the firm is seeing increasing demand from hospital pharmacies. It is also probable that next-generation personalised medicine – including gene and stem-cell therapy – will give demand for Bioquell’s products a boost.
So effective is Bioquell’s science that it has even been selected by the American Defence Department to decontaminate military gear from biological and chemical warfare agents. In June it won a £4m order to supply similar systems for armoured vehicles in Malaysia.
Bioquell (LSE: BQE)
But that’s not all. The firm’s other division (TRaC), which provides specialist product testing, regulatory and compliance services principally in Britain, grew 8% in the first half.
House broker Investec is forecasting 2011 turnover and underlying earnings per share of £42.9m and 8.1p respectively, rising to £44.6m and 8.9p in 2012, together with a 2.7% yield. On this basis I rate the stock on an 11 times 2012 earnings before interest, tax and amortisation (EBITA) multiple. After discounting back at 12% and adjusting for net cash of £4.6m, that generates an intrinsic worth of 130p a share. Nonetheless, the stock has fallen on fears of cuts to government budgets.
Bioquell is still a relatively small player and is reliant on a few key areas, which could make it vulnerable if a better technology is invented. And with its substantial overseas presence, foreign exchange is a risk too.
All the same, Bioquell has the potential to offer excellent long-term returns. With its recognised expertise in the field of bug control, I would not be too surprised if it was snapped up by an opportunistic predator.
Investec has a target price of 127p.
Rating: SPECULATIVE BUY at 105p (market capitalisation £44m)