Omega Diagnostics

Diagnostic kits supplier Omega (ODX) has reported results slightly ahead of expectations, driven by strong demand for its range of food intolerance products.

Last year the AIM counter transformed its prospects, following the £4.9m acquisition of Germany-based IVD allergy business Allergopharma. This has pushed Omega into a high-margin market, and moreover the operation has been able to tap into a wide distribution network in more than 100 countries. Though Germany is the largest market in Europe, the business was too heavily reliant on the country, and it had also been neglected by its parent.

In the year to March, sales increased 27% to £7.9m as pre-tax profits jumped 25% to £740,000, while a successful placing last year has left Omega with net cash of £450,000. Current trading is good but the real excitement should come in 2012/13, thanks to a licensing agreement with Immunodiagnostic Holdings to sell its allergy-testing IDS-iSYS machine.

Though still in the development phase, the product will be sold into clinical laboratories, with Omega making a good repeat margin on the use of its range of Allergens. Targeting a $408m market, the IDS-iSYS machine is the classic razor to razor blade model, which should help Omega generate plenty of cash.

Omega has expanded coverage of its Genarrayt microarray systems with 95 units now installed in 24 countries. Over the coming months there will also be a big push into the growing BRIC countries (Brazil, Russia, India and China). House broker Cenkos predicts 2012 pre-tax profits of £1.8m and EPS of 1.5p, while in 2013 the expectation is for sales of £20.7m, pre-tax profits of £5.2m and EPS of 4.5p.

There is clearly potential execution risk for the IDS-iSYS system, but with the trends in its underlying markets positive the shares are too low. Buy.