Investors chronicle: 'IXICO upgrades guidance again'

Published on investors chronicle: 15th October

Author: Simon Thompson

The world’s largest biopharmaceutical companies are investing huge sums of money in the field of neurology to target therapies for diseases affecting the central nervous system including Huntington’s, Alzheimer’s and Parkinson’s disease.

This is good news for Aim-traded IXICO (IXI:58p), a London-based company that uses proprietary artificial intelligence (AI) software algorithms to analyse images from brain scans – magnetic resonance imaging (MRI) and positron emission tomography (PET) – in order to provide measurements of small changes in brain structure, assess the efficacy of new drugs being trialled, monitor patient safety, and provide valuable insights on different aspects of trial performance.

In fact, demand for IXICO’s services is so strong that analyst Chris Donnellan at house broker Cenkos Securities has upgraded his revenue forecast (for the second time since August) by 6 per cent to £7.55m for the financial year just ended, implying 40 per cent year-on-year growth. He also raised revenue forecasts for the 2020 and 2021 financial years to £9.1m and £10.9m, respectively, implying 6 per cent upgrades. IXICO's closing order book of £15.9m offers substantial visibility and includes an estimated £7.5m of new orders won this year. In addition, net cash of £7.3m is £1.8m higher than I was anticipating when I last suggested buying the shares at 47p (IXICO on the upgrade’, 20 August 2019), highlighting a strong funding position to deliver on the contracted order book and pipeline of new business.

Moreover, with orders flowing in, IXICO’s operating leverage is really kicking in, so much so that Cenkos now predicts a £50,000 operating profit (previous forecast loss of £113,000) in the year just ended, reversing a reported loss of £793,000 on revenue of £5.4m in the 2018 financial year. That outcome is far better than I anticipated when I first suggested buying the shares at 33p ('Alpha Report: Simon Thompson spies opportunity in cutting edge technology', 23 July 2019).

Also, with the benefit of a high gross margin of 62 per cent, and a relatively fixed cost base, then a higher proportion of incremental margin earned will drop to the bottom line on rising sales which is why Cenkos raised its 2020 operating profit estimate by 25 per cent to £298,000 and upgraded its 2021 forecast from £878,000 to £941,000. There could be upside to these revenue forecasts, too.

The point being that even though IXICO’s share price has risen by 75 per cent since I first advised buying the shares in July, its enterprise valuation of £20m still only equates to 20 times 2021 operating profit estimates, a modest multiple for a highly operationally geared business in a strong earnings upgrade cycle. In the circumstances, I am raising my target price from 62p to 75p ahead of the annual results in early December. Buy.

Original article published on investors chronicle:


Date: 15/10/2019