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InnovaDerma – “confident in meeting market expectations for the current financial year”, so why an approaching 13% share price fall?

By Steve Moore | Wednesday 17 January 2018

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

InnovaDerma (IDP) “is pleased to provide a trading update for the six months ended 31 December 2017” - and it includes “the board remains confident in meeting market expectations for the current financial year and has much greater revenue visibility for the second half than in prior years”. So why an approaching 13% share price fall on the back of it, towards 230p?

Specifically, the update noted “revenue for the period increased by 31% on a constant currency basis to £4.2m (H1 FY2016: £3.2m)”. This compares to house broker, finnCap, currently forecasting a full-year adjusted pre-tax profit of £2.4 million on revenue of £13.8 million, generating earnings per share of 11.5p. In the previous full-year, a pre-tax profit of £1 million on revenue of £8.9 million was delivered.

These numbers suggest the current full-year forecast quite an ask - the company though arguing “peak tanning season approaches. In addition, entry into new markets together with new product launches such as Roots, Charles + Lee, StevieK Cosmetics and Prolong are expected to feed through to substantial revenue and profit growth in the second half of the year”.

There does thus look to at least be some justification for its apparent confidence, but, even at circa 230p, the forecast price/earnings multiple is approx. 20. I’d suggest this leaves a lack of a Benjamin Graham ‘margin of safety’ (for absorbing the effect of miscalculations or worse than average luck”).

I do also note that finnCap currently sees earnings per share continuing strong growth – to more than 18p next year and more than 22p thereafter. The value looks much more attractive on these bases, but, at least, ahead firstly of half-year results scheduled for 15th February and also further comfort of the second half weighting expected actually being delivered, I avoid.

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