Brian Marckx, CFA
Comp Valuations Warrant Higher Price Target
Outlook
We expect combined domestic and international sales of Chembio’s (CEMI) lateral flow products to come in about 9% higher in 2010 compared to 2009 as a result of a resurgence in sales in both Africa and the U.S. during Q3 and expected during Q4. We model total revenue to grow 18.3% in 2010 and despite the spike in R&D expenses, Chembio should generate positive net income for the full year (we model $895k).
The revelation at Q3 quarter-end that Chembio has been in discussions with (and continues to do so) two potential suitors makes things even more interesting. We believe management is unlikely to consider a buyout anywhere near the current valuation but we think several companies would all have reason to make a play for the company.
Longer-term, we project revenue to grow from $16.4 million in FY2010 to $19.1 million in 2011. We think this grows to $29.5 million in 2012 and $40.5 million in 2013. Our model does not currently incorporate a launch of the DPP products into the OTC market prior to 2013, although we expect an eventual OTC introduction to add significantly to the already robust long-term revenue and earnings growth prospects for the Company. We look for 2010 EPS of $0.01, up from $0.00 in 2009 and for this to show continuous improvement for the foreseeable future, benefitting from significant growth in revenue and continuous improvement in operating margin. Based on our model we forecast EPS of $0.07 in 2013.
Valuation
We are maintaining our Outperform rating of Chembio Diagnostics with an Outperform rating. Based on the potential for the DPP product portfolio to significantly ramp long-term revenue, cash flow and earnings we feel the Company is grossly undervalued. We have also increased our price target for Chembio based on recent increased comparable valuations.
Our previous price target of $0.92 for Chembio was calculated using 3.0x forecasted 2011 sales, which was based on the high-end of comparable valuations (average at the time was 2.2x forecasted 2011 sales). Since our last report (November 5, 2010) valuations in the rapid HIV testing space have moved up considerably. The average forecasted 2011 revenue multiple of competitors has increased to 3.0x, with 3.7x being the high-end. Using the high-end values Chembio at $1.00. We believe the high-end of this range is warranted as we expect that Chembio’s revenue growth rate will only begin to show significant acceleration beginning in early 2012 (following the DPP HIV and syphilis launch).
For a copy of the full research report, please email scr@zacks.com with CEMI as the subject.
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