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hVIVO (LSE:HVO) is a small-cap UK stock that has soared almost 400% in five years, so it clearly doesn't need a raging bull market to do well.
But with interest rate cuts on the horizon and a new government committed to stability, I think the stage is set for smaller UK stocks like this to perform very strongly.
H1 record
For those who don’t know, the company is a contract research organization (CRO) specializing in human challenge trials. In these trials, healthy volunteers are exposed to pathogens to test vaccines and treatments, providing critical data on efficacy and safety in a controlled environment.
The company recruits volunteers through its FluCamp platform, which has a database of more than 320,000 participants. Its clients are generally biopharmaceutical companies.
In July we received an update on the company's operations for the first half of the year, meaning that most of the company's interim results published today (10 September) were already known. Nevertheless, the report confirmed solid progress.
Revenue rose 30.6% year-on-year to £35.6m, while EBITDA increased 67.6% to £8.7m. That EBITDA margin of 24.5% improved from 19.1% last year. Adjusted core earnings per share increased 30.6%.
The company ended June with £37.1m in cash, up from £31.3m in the previous year. It has started paying an annual dividend.
Looking ahead, management expects annual revenue to be £62m, which would represent revenue growth of around 11%. And 100% of that forecast is already fully contracted.
EBITDA margin is anticipated to be at the high end of market expectations (22%-24%).
By 2028, the company expects annual revenues of at least £100m, suggesting total revenue will grow at a compound annual rate of around 14%.
Further margin expansion is expected
This growth will be supported by the company’s new state-of-the-art quarantine facility in Canary Wharf, the largest human challenge unit in the world.
During the first half of the year, he helped support the inoculation of a record number of volunteers in several studies.
Prior to the move, hVIVO used quarantine rooms on multiple floors, allowing samples to reach the lab in 7 to 8 minutes. The new facility is on a single floor and features a pneumatic duct system, reducing sample transport time to about 30 seconds.
Operational efficiencies such as this are expected to further improve profit margins. The company also continues to diversify its revenue streams through clinical trial design, volunteer recruitment services, and hLAB, its specialty laboratory services offering.
The weighted contracted order book stood at £71m in June, but management anticipates a £40m pipeline of promising opportunities in the near to medium term.
Fair valuation
Naturally, the company could face reputational risks if a high-profile issue arises during a trial. Moreover, it does not have a long track record of profitability.
In terms of valuation, the stock is trading at a price-to-sales (P/S) ratio of 3.5 and a forward price-to-earnings (P/E) multiple of 20.5. Neither of these seems excessive to me.
Looking ahead, I think the stock could rise, especially if a bull market starts. I became a shareholder last year and increased my position this year. It remains one of my favorite small-cap stocks.
