Scientific trials agency hVIVO (LSE: HVO) delivered a buying and selling replace in the present day (29 January). This can be a inventory that I personal, having constructed up a place over the previous couple of years. Nevertheless, whereas I nonetheless view it as one of many extra promising small-cap shares to think about shopping for, it’s proving much more risky than I anticipated.

To present a flavour, the share price in the present day has dropped 5% to 19p, as I write. Nevertheless, within the two weeks prior, it had surged practically 30%. Over 5 years, it’s up 252%, however down 36% since mid-November. Did I point out that it’s risky?!

Trying via the replace although, I believe there are a few issues in addition to long-term potential.

What occurred?

For these unfamiliar, hVIVO is a contract research organisation (CRO) that specialises in human problem trials (HCTs). These contain recruiting wholesome volunteers — signed up via its personal FluCamp recruitment platform — and exposing a few of them to pathogens to check vaccines and therapeutics.

Right now, the corporate really delivered two bulletins. First, there was the buying and selling replace for 2024, which confirmed 12% year-on-year income progress (£62.7m) and a robust EBITDA margin of roughly 26% (up from 23.3% in 2023). It ended the yr with £44.2m in money, up from £37m the yr earlier than.

Operationally, hVIVO made stable progress, opening the world’s largest business HCT unit. This 50-bedroom facility has additionally enabled the agency to diversify its choices to incorporate laboratory providers for exterior purchasers. Earlier this month, it inked its largest standalone lab contract signed to this point (£2.7m).

The second announcement provided steering and associated to the acquisition of a pair of medical research models from a CRO in Germany. The corporate mentioned this deal “additional diversifies hVIVO’s providers to incorporate in-patient Section I and Section II trials throughout a broader vary of therapeutic areas“.

The acquisition price €10m, funded totally from hVIVO’s current money sources. Nevertheless, whereas the models recorded unaudited income of practically €20m final yr, in addition they reported an adjusted EBITDA lack of €1.8m.

Why is the inventory down?

So, the agency is utilizing money to purchase loss-making companies overseas. Furthermore, it plans to spend one other €2.5m on integration prices in 2025. Consequently, administration has warned that this can affect EBITDA margins within the quick time period, guiding for mid-to-high teenagers (considerably lower than final yr’s 26%).

Nevertheless, it additionally expects the acquisition to contribute positively to earnings by 2026. And it offers hVIVO a “significant footprint” in Europe whereas providing “considerable cross-selling opportunities” on account of a broader consumer base.

Trying ahead, it expects income of £73m this yr, together with this deal. If we assume comparable income on the acquired enterprise (round £16m), then this implies core income might be flat or declining, hinting at weak natural progress. That’s not excellent.

Then once more, the agency has beforehand acknowledged that it expects acquisitions like this to assist get it to £100m in income by 2028.

My view

Stepping again, I believe the market response in the present day is comprehensible. Nevertheless, the inventory at 19p should be value contemplating for affected person buyers.

Given this can be a enterprise with a modest £129m market cap although, I’m maintaining my holding small relative to my total portfolio. That method, I can profit if it goes up whereas minimising harm if it doesn’t.