Immunodiagnostic Systems (IDS), a producer of manual and automated specialist diagnostic testing kits, reported a decline in unaudited revenues for the five months ended August 31st.

Turnover was down to £19.9m from £22.7m in the same period the previous year, partly the result of an adverse £0.5m impact of exchange rate differences between the two periods. It expects the impact of exchange rates compared to the prior year to continue to have an adverse effect on full year revenues, but the impact on earnings is expected to be mitigated to some extent as the cost base of the group's foreign currency denominated operations will generate a favourable variance.

The five month period in 2011 included a £0.4m one off licence fee and no such fees were generated in the comparable period to August 31st 2012. On a like-for-like basis revenues fell by 9% compared to the same period the previous year.

Broker Panmure Gordon said the 12% revenue decline was worse than expected. "Although automated revenues grew 15%, this was considerably lower than our expectation of [greater than] 30% growth," Panmure analyst Savvas Neophytou said.

"On outlook the company guided to FY2013 [fiscal 2013] revenues of £48-50m, which is below our forecast of £55m," the broker added.

More positively, the recent launches of 1,25 Dihydroxy vitamin D, renin and aldosterone automated assays have been well received in the market, despite these occurring later than planned.

IDS-iSYS revenues grew strongly by 15% over the prior period whereas manual revenues declined, as expected, by 19%, reflecting the continuing competitive environment of this market place and the transition of certain laboratories from manual to automated testing.

A total of 32 IDS-iSYS instruments have been sold or placed to reagent rental IDS end user customers during the period, net of returns, representing an increase of 18% over the installed base as at 31 March 2012.

Panmure Gordon reacted to the trading update by downgrading its full-year sales forecast by some 7%, and next year's forecast by 9%. As a result of this, the broker's price target for the stock has been chopped to 350p from 400p, although the "buy" recommendation is retained, "as we continue to see value in the platform".

"Looking at valuation (1.2x Revenues & 6.1x PE [price/earnings]), it is obvious to us that perhaps further market downgrades to forecasts will materialise in coming months," the broker said.

"The business remains in choppy waters, with the well-known entrance this year of a number of larger competitors in IDS's relatively small market. The macro environment, particularly in Europe, is not helping either," Panmure Gordon continued.

"Despite the challenges, we believe there are still significant niches in the market (smaller laboratories that cannot afford the larger fully integrated machines which Roche, Abbott and Siemens sell, hospital labs or teaching hospitals that require better precision etc) which the company can target to boost its recovery. Overall we have been comforted from what we heard in our meeting that Patrik Dahlen and his vision seems sensible to us," Neophytou concluded.

finnCap is one of those currently reviewing its forecasts, even though it only updated them six weeks ago.

"Assuming that margins are maintained, and the costs remain as per our model, then sales of £47.9m would lead to PBT [profit before tax] of £8.3m and adjusted EPS [earnings per share] of 44.0p (22.7p basic)," postulated finnCap's Keith Redpath.

"Whilst the current share price places IDS on un-demanding multiples, even with reduced expectations, concerns over IDS's ability to continue to grow iSYS revenues significantly remains. At best the shares are a Hold," Redpath believes.

House broker Peel Hunt has gone ahead and chopped its earnings forecasts. It now predicts profit before tax of £9.4m for the current financial year, down from its previous forecast of £13.5m. The EPS forecast is chopped to 23.5p from 33.6p.

"On the bright side placements of ISYS are tracking ahead of our expectations and
remain the key driver of strategic value," said Peel Hunt, which has retained its "buy" recommendation despite chopping its price target from 450p to 375p.

The share price fell 9.82% to 252.50p by 15:28.

NR

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