Why I rate CogState Ltd shares a speculative buy

This morning cognitive science business CogState Ltd (ASX: CGS) revealed that revenue for the quarter ending March 31 2018 hit US$8 million, which is up 33% on the prior quarter. The company also boasted it signed US$8.3 million in new sales contracts over the quarter and that total contracts signed were worth US$29.9 million over the first 9 months of financial year (FY) 2018,  which is already ahead of the US$29.5 million posted in the whole of FY 2017.

Cogstate also reaffirmed guidance for “improved earnings” over the second half of FY 2018 as its key financial metrics continue to trend in the right direction for investors over the medium term.

The group is a leader in brain function testing trials that help large pharmaceutical companies measure the effectiveness of potential new treatments for common cognitive ailments such as Alzheimer’s or Parkinson’s disease.

As such it’s in a niche sector but that shouldn’t put off small-cap enthusiasts as the sector has some tailwinds as healthcare research and spending tends to grow over the long term.

The company is also just about tipping into profitability with an operating cash inflow of US$1.5 million for the most recent quarter, backed up by a decent balance sheet of no debt and a cash balance of $5.7 million.

The kicker is that the valuation looks reasonable especially in comparison to more popular healthcare juniors on the local market such as Nanosonics Ltd (ASX: NAN) or Medical Developments International Ltd (ASX: MVP).

Cogstate’s market value at 84 cents is only $96 million based on 114.2 million shares on issue as at June 30, 2017. As such it trades on not much more than 2x annualised FX-adjusted revenues ,with potential to grow and earn decent profits into the future. As a small-cap punter you can’t ask for much more than that and at 84 cents I’d rate the shares a spec buy for investors prepared to take on more risk in pursuit of higher returns.

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Motley Fool contributor Tom Richardson has no position in any of the stocks mentioned.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia owns shares of and has recommended Nanosonics Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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