Microbix Biosystems delivers record profits, iA Capital says

Chelsea Stellick of iA Capital Markets has done a markdown on Microbix Biosystems (Microbix Biosystems Stock Quote, Chart, News, Analysts, Financials TSX:MBX), maintaining a “Buy” rating for the company, but reducing the target price of $1.70/share to $1.50/share for a projected return of 130.8 per cent in an update to clients on Thursday.

Founded in 1988 and headquartered in Mississauga, Microbix Biosystems develops and commercializes proprietary biological and technological solutions for human health and wellbeing in North America, Europe and internationally.

Stellick’s updated analysis comes after the company officially released its financial results for the first quarter of its 2022 fiscal year, while noting that her target drop was the byproduct of a higher share count and multiple revision.

“Q1/F22 was a solid quarter for MBX as it reported in line revenue and record profitability,” Stellick said. “A favourable product mix resulted in record gross margins, which we expect to continue to remain strong through F2022 and beyond.”

Microbix’s financial quarter was headlined by $4.9 million in revenue, within reasonable territory of Stellick’s $5 million projection as the figure produced a 54 per cent year-over-year gain. However, the revenue total also represented a 14 per cent sequential decrease, with Stellick attributing that change to some customers taking pause amid the anticipated impacts of seasonality and the current upgrade cycle for several diagnostic platforms.

Financial results varied from one segment to another, with Microbix continuing to benefit from COVID testing in its QAPs segment ($1.1 million, up 18 per cent year-over-year), as well as generating $1.8 million from its VTM segment after not having any in the opening quarter of 2021. 

According to Stellick, the VTM segment is also set to become automated as the company works to get its third operational site in Mississauga off the ground, while being further boosted by the potential of expanding VTM to include use in other viral tests.

On the other side, revenue in the company’s antigens segment was down 17 per cent year-over-year to $1.8 million, with Stellick linking that number to the ongoing drop in non-COVID testing.

Microbix produced another significant highlight in the quarter, as it produced a 13 per cent sequential increase in net income to $900,000 while seeing its gross margin rise from 55 per cent in the opening quarter of 2021 and 58 per cent last quarter to 66 per cent in the updated results, a 573 per cent year-over-year increase. 

“The favourable product mix including more branded product sales and the benefits of manufacturing upgrades are both sustainable changes enabling ongoing improved profitability,” Stellick said.

One factor to keep an eye on for Microbix will be to see how the company performs as COVID-19 testing declines, particularly as its DxTM offering is still its biggest revenue driver, according to Stellick.

“Offsetting the lower level of testing, however, we believe Microbix can grow its domestic market share since having secured a place on the preferred supplier list for the Province of Ontario and having provided an emergency order out of inventory at a time when COVID testing supplies were scarce,” Stellick said.

The updated financials have pushed Stellick toward making slight changes to her annual financial projections, dropping her revenue target for 2022 from $22.7 million to $22.5 million, which still suggests a year-over-year increase of 21 per cent. Stellick also made a small change to her 2023 estimate, dropping it from $24.5 million to $24.3 million for a projected year-over-year increase of eight per cent.

From a valuation standpoint, Stellick sees the company’s EV/Revenue rising from 1x in 2021 to 4.7x in 2022, then starting to dip to 4.3x in 2023.

Meanwhile, coming off a positive 2021, Stellick continues to project Microbix’s EBITDA to grow to $7.1 million in 2022 for an implied margin of 31.6 per cent, though that number is down from the initial $7.3 million forecast with a margin of 29.5 per cent. Looking ahead to 2023, Stellick makes a minimal revision to $8 million in EBITDA for a margin of 32.9 per cent, compared to the previous forecast of $8.1 million and a margin of 33.1 per cent. 

In terms of valuation, Stellick introduced an EV/EBITDA multiple of 20.5x in 2021, which she forecasts to drop to 14.8x in 2022 and 13.2x in 2023.

Microbix had $10 million in cash on hand at the end of the quarter, and Stellick believes the company is well positioned to invest in expanding its product offering, such as rolling out its recently announced new QAP for the omicron variant.

“MBX is poised for continued growth as it has invested heavily in adding capacity, both in production automation and in new SKUs,” Stellick said.

Microbix’s share price has made its way up by 11.5 per cent over the last 12 months, though it is down by 16.1 per cent since the start of 2022. The stock has come back down to earth since hitting a 52-week high of $0.84/share on Christmas Eve, but is still above the 52-week low of $0.50/share from July 12.