Despite all the geopolitical uncertainty, there is still a lot of positive corporate news.
Not least today’s complementary £18.5m (excl max £15m of earnouts) acquisition by laboratory services firm SourceBio of LDPath. A rapidly expanding UK leader in the field of digital pathology testing (eg tissue samples/biopsies), say used for cancer screening.
Ok, so what’s the strategic rationale?
Well firstly this is a large, growing & profitable sector, where the NHS already spends around £2.5m pa (+10% pa) – driven by aging demographics, lengthening waiting lists (>6m) & an ongoing shift towards earlier diagnoses.
On top, a greater proportion of this budget is being out-sourced to 3rd parties, given the NHS’ limited in-house resource & shrinking pool of pathologists.
Especially to those specialists offering telemedicine, where there is not only much faster turnarounds (eg from 5-7 days to ultimately <24 hours) & higher throughput, but also substantial efficiency savings & more accurate results.
Next the transaction is set to be both earnings & value accretive. In fact, even on a standalone basis, I reckon LDPath would have been able to deliver turnover & EBITDA of c. £7m & £1.75m (25% margin) respectively by 2024 – equivalent to a fwd EV/EBITDA of 10.6x.
Plus, when the estimated cost (R&D, purchasing, etc) & revenue (x-selling) synergies are added, the multiple drops to 8x according to Liberum.
Lastly, LDPath is already well known by management. Meaning any integration risk should be lower than normal. Leaving too a hefty post-completion net cash figure of £15.6m (or 21p/share) – enabling further M&A &/or stock-buybacks.
Sure there’s recently been (as predicted) a decline in UK PCR testing volumes following the lifting of Covid restrictions (eg air-travel). However this does not diminish from the long term trajectory of the group.
Indeed, Liberum are forecasting turnover & EBITDA to be £39m & £6.9x this year, climbing to £39.8m & £8.7m next - alongside a 220p/share target price. The latter based on an implied 16.3x multiple for 2023 vs 8.1x today at 124p.
All in all, highlighting SBI's material upside potential for patient investors.