Testing the market…clinically speaking

London Medical Laboratory (LML) is a London-based independent clinical testing specialist and provider of pathology diagnostics services. Through its vertically integrated laboratory service, its long-term goal is to establish a network of partners and healthcare professionals (HCP) to make blood tests readily accessible to individuals. Meanwhile, LML adapted rapidly in 2020 to take advantage of the COVID-19 testing opportunity, which transformed the company into a profitable and cash-generative operation. LML is growing fast and taking market share in the fragmented £700m (non-NHS) private clinical laboratory market in the UK.

• Strategy: LML has a dedicated state-of-the-art laboratory, which currently has the capacity to run 8,000 tests per day. Given the pressure on general practitioners (GPs), coupled with individuals taking a greater interest in personal health and wellbeing, LML aims to establish a strong network for private tests.
• Growth: Although there is some uncertainty about how long COVID-19 tests will be required, which is reflected in forecasts, LML looks set for a CAGR in sales of ca.36% over the next five years, boosting profit and cash generation. This rate of growth could be accelerated with additional cash from its proposed IPO.
• Valuation: The closest peer is MyHealthChecked (MHC.L), which trades on an EV of ca.£14m. However, LML’s sales are 1.8x higher than MHC’s and LML is more profitable and cash-generative. Against a weighted-average peer group, at the mid-point of the valuation range, LML would be at a significant discount.
• Risks: In 2020, COVID-19 tests represented 99% of group sales. Although there is a downward trend, COVID-19 tests will remain important for the next three years, while LML expands its pathology service. It is possible that expansion of its blood-testing service will take longer and require greater investment.
• Investment summary: LML is very well-positioned in the rapidly growing private clinical laboratory testing market in the UK. Research strongly indicates that COVID-19 tests will be essential for at least another 18-24 months. The mid-point of the proposed pre-money valuation range indicates a large discount on both EV/sales and EV/EBITDA compared with the weighted average of its peers, suggesting that there is scope for considerable post-IPO upside.