With news of a public government disclosure for a contract worth up-to £374m,for Omega Diagnostics many will be asking why the markets gave the news a lukewarm reception.
A £374m contract for a company with a £180m m.cap would suggest that the share price should have been firmly one way and fast – that’s North!
However after a limited surge upon the opening of the market, Omega Diagnostics share price now finds itself with a slight fall in price during the day.
Here’s why in our view:
- Omega Diagnostics is just too honest. It heavily countered the disclosure notice with what may or may not happen. While others would’ve just rolled with it, it educated investors on the mechanics of the disclosure notice.
- It may be worth a lot less than £374m. Omega Diagnostic’s honesty sent chills down investors; it noted that the value of orders may be ‘substantially less’ and the disclosure noticed referenced a range starting at £50m.
- There is still no test. While it seems inevitable Omega Diagnostics will have a test to manufacture, it continues to mention that it doesn’t have one yet.
- The numbers. Assuming a 50% margin for Omega Diagnostics, a £374m contract would be truly transformational for the business. However, a number ‘substantially less’ would not be quite the same, although still received well given its financial position.
- The Novacyt effect. As we’ve seen with Novacyt, there comes a point where investors will say OK you had a good year, but what about the next few years? Omega Diagnostics will still have to give reassurance over this with a m.cap of £180m based on a great deal of expectation.
Our View: Is Omega Diagnostics just too honest?
Given Omega Diagnostics’ honesty and strong morals, we think that no RNS would have been better today. While eager to highlight a potentially large and incoming contract, it also negated this with doubts it may not be that big.
Ideally it would have tied the news of the potential contract award with some positive news about its manufacturing capacity or similar.
Today’s RNS seemed to be caught in two minds whether to ramp or deramp; and it somehow got stuck in between both camps!
However, we think they should also be commended for their approach which is something of a rarity these days. They are essentially saying they could have a huge surge of revenue or maybe they will only have a small-medium increase in revenue.
Time will tell, but Omega Diagnostics is giving investors information to help them make an informed decision on whether to buy, hold or sell.