Instem worth 24% more

I first spoke to Instem early last year. The AIM-listed company was worth £22 million and demand for its software, which helps drug companies develop commercial drugs more efficiently, was picking up. I didn't write up the call for some reason. I wish I had. The share price is up about 50%, and management tells me business should really take off next year.

That's because Instem's software and services also enable drug companies to fulfil reporting and compliance regulations. It's significant because the US Food and Drug Administration (FDA) has made the electronic submission of study data mandatory by the end of 2016.

Instem has signed six contracts for Standard for the Exchange of Non-Clinical Data (SEND) over the past six months, worth over $1.6 million. Chief executive Phil Reason expects to do about 30-40 SEND conversions this year, but potentially 400 in 2017. We'll get a better idea of whether that's achievable in the "next 3-4 months," I'm told, but Reason certainly expects "150-plus".

That level of confidence is why house broker N+1 Singer has just upgraded full-year revenue forecasts for 2016 by £0.6 million, and by £2 million for subsequent years. Earnings per share (EPS) estimates, already upgraded earlier this month following the acquisition of Notocord, remain unchanged as higher costs offset the rise in revenue.

Strip out currency fluctuations and half-year adjusted pre-tax profit grew by £0.3 million to £1 million on revenue up 21% to £9.1 million. Adjusted EPS was up from 5.1p to 6.3p. For the full-year, Singer analyst Chris Glasper expects £2.2 million, £19.5 million and 10.5p, respectively.

"The valuation remains undemanding on an FY17 EV/EBITDA [enterprise value/cash profit] of 10.6x and an EV/Sales of 1.8x," writes Glasper. "We see fair value of 323-341p based on a composite EV/Sales analysis and a [discounted cash flow]. The strategic value of consolidating the life sciences IT market should also not be underestimated."

I may not have written up Instem before, but Andrew Hore did. The former AIM writer of the year and regular Interactive Investor contributor wrote here in July that Instem could be snapped up by predators at an attractive price.

That assessment followed the acquisition of ARM Holdings by Japan's SoftBank.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.