How EKF Diagnostics surged 23%

Unloved for the last two years, proof that EKF Diagnostics' critical restructuring programme is making progress has sent the share price to an 11-month high. A brief trading update confirms that sales and profits are likely to smash forecasts for the year and the AIM-listed medical diagnostics firm should be cash positive within 12 months too.

"Trading in third-quarter of the current financial year was materially higher than budget and at a run-rate in excess of market forecasts," we're told. "As a result the company is now confident of achieving revenues and adjusted [earnings before interest, tax, depreciation and amortisation] for 2016 which will exceed the high end of current market forecasts."

That's got Panmure Gordon analyst Julie Simmonds crunching the numbers. She likes improving sales across the business including Hemocontrol and the Quo products, and particularly strong sales in clinical chemistry.

"The period has not seen any revenue contribution from tenders," she writes Friday. "This points to continuing improvement across the base business since the restructuring commenced in late 2015."

Already at the high end of previous guidance, Simmonds will upgrade her forecasts of £33 million revenue and £3.9 million cash profit for 2016. EKF also says strong cash generation has helped pay down debt and management now hopes to be cash positive within a year.

As management moves into the investment phase of its restructuring programme, EKF plans to increase consumables capacity in Germany and replace equipment in America next year, both of which should improve margins further.

The company has spent time simplifying the business to focus on core operations and drive its Point-of-Care (POC) and Central Laboratory offerings into growth. The POC division is split into three businesses: haematology, diabetes, and maternal & women's health. Delivering 7,000 analysers and 35.5 million tests, the organic growth delivered across the three units in the first half will have continued into the third quarter.

The shares trade on 42 times 2016 earnings, dropping to 28 times on 2017Confirming that restructuring is bearing fruit triggered a 23% surge in EKF's share price Friday to nearly 18p, levels not seen since November 2015. EKF has struggled with disappointing acquisitions, weak margins and adverse currency movements, but this was just the catalyst needed to launch the shares above the downtrend line and toward technical resistance at around 20p.

The shares had collapsed 84% over the past two years, bottoming at 7p last November and stuck trading sideways until a post-referendum rally took them back above 15p.

Panmure Gordon reckons a share price of 17.5p looks fair value, representing 2.5x 2017 sales forecasts. The shares trade on 42 times 2016 earnings, dropping to 28 times on 2017 numbers .

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