Advanced Medical Solutions Group PLC (LON: AMS) – Reaffirmed Dividend, Albeit Anticipating Sluggish Demand During the Pandemic.

Advanced Medical Solutions Group PLC is a FTSE AIM UK 50 Index listed Company. It is engaged in designing, manufacturing, development and distribution of advanced wound care products, medical-grade materials, and surgical dressings. In addition, it manufactures sutures and medical adhesives for sealing and closing tissue. The Group was founded in 1991 in Cheshire, the United Kingdom to serve major healthcare companies with advanced wound care products. In 2002, the Company acquired MedLogic Global Ltd, which bolstered the capability with cyanoacrylate based medical adhesives. In 2009, the Group acquired Corpura BV, in a joint venture with Recticel. Further in 2019, the Company completed the acquisition of Sealantis Limited and Biomatlante SA, for advancement in surgical sealant products and surgical biomaterial technologies. Presently, the Group employs around 700 people to serve in about 77 countries worldwide.

The Company is expected to release the half-yearly results for FY20 in early July 2020.  

 
(Source: Company Website)

Key Fundamental Statistics



Snapshot of Business and Geographic Segments

The Group operates through two divisions - Surgical and Woundcare. The Group’s headquarter is in the United Kingdom and has nine manufacturing facilities. There are six sales offices in Europe, one sales office in Russia and in the United States. Geographically, the Company splits the sales into five core markets – the United Kingdom, Germany, Europe (excluding the United Kingdom and Germany), the United States, and Rest of World.


(Source: Presentation, Company Website)


(Source: Annual Report, Company Website)

Recent Landmarks for Organic and Accretive Growth

10^th June 2020: The Group experienced a strong demand for LiquiBand® during the first quarter of 2020; however, there is a demand slowdown in the second quarter, which might affect the total revenue.

18^th May 2020: Peter Allen decided to step down, with effect from 6^th May 2020, from the Audit Committee.

10^th March 2020:US Food and Drug Administration has approved LiquiBand® Rapid™ product of the Group. It will serve as a key driver for organic growth under LiquiBand product range.

2^nd December 2019:The Company acquired the surgical biomaterial technology entity, Biomatlante SA, for the consideration of EUR 8 million in cash.

Non-Financial Key Performing Indicators in FY19

The customer service is measured in OTIF (On-Time in Full), which was impacted in the FY19 due to stock shortage during sterilisation delays and recertification of the RESORBA® portfolio. The Company expects OTIF to bounce over 90 per cent in 2020.

Moreover, the employee engagement score surged to 48 per cent in FY19, and the Group targets to increase this further in 2020. It reflects the potential for higher retention and productivity.


 (Source: Annual Report, Company Website)
 
Top Shareholders Statistics

 

Update on Trading Performance and US LiquiBand® 

On 10^th June 2020, Advanced Medical Solutions Group released an update on the trading performance and US LiquiBand®. The Group is focused on ensuring the health and safety of its employees. All the manufacturing sites are operational and maintaining their commitments related to the supply of medical devices to customers and healthcare partners globally. The financial condition of the Company remained strong, with a robust cash balance despite the global disruption. As on 31^st December 2019, the Group’s cash balance stood at GBP 65 million with no debt and undrawn unsecured credit facility of GBP 80 million. In April, AMS announced a slowdown in demand due to postponement or cancellation of dental procedures, elective surgeries and lower emergency treatments. The treatment for chronic wounds in hospital remained slow with supply disruption. The Group expects a decline in the revenue on the higher side 3% - 5% range of annual sales/month. AMS expects hospital activity for wound care, and surgical businesses will return to normal levels gradually, and business will be impacted by covid-19 in the H2 of FY2020. The Group’s volume will take time to recuperate to pre-COVID-19 levels. AMS has taken actions to reduce its operating costs, capital expenditure and working capital to remain in the robust operational and financial position to return to growth quickly when the markets recover. Based on the strong financial position and long-term prospects, the Board intends to pay the proposed final dividend for FY2019.

The Group’s LiquiBand® showed signs of recovery based on end-market sales data, strong sales volumes in Q1 FY2020 and increased market share. The Company, along with its main partners in the US, launched LiquiBand® Rapid™. The US partner is well-positioned to compete once the hospitals re-open for elective surgery. The Group completed a critical pilot study for LiquiBand® XL and believes that lead formulation maximises the potential for commercial success for long-term. It is expected to file for approval in Q1 FY2021. LiquiBand® XL will allow the Company to enter into the larger wounds care market and will unlock growth potential in LiquiBand® business once approved.

Financial Highlights – Decent Control Over Operating Expenses in FY2019 (31^st December 2019)

 
(Source: Annual Report, Company Website)
 
For the financial year ending 31^st December 2019, the Group’s revenue stood at GBP 102.4 million as against GBP 102.6 million in FY2018, primarily driven by the growth achieved across various categories though was offset by a decline in the US LiquiBand® business,  Due to a decline in the revenue and decent control over the operating expenses for the period, the reported operating profit stood at GBP 24.24 million in FY2019 versus GBP 28.47 million in FY2018, with an operating margin of 23.7 per cent. The adjusted operating margin stood at 26.4 per cent for the period. The adjusted PBT (profit before tax) stood at GBP 26.6 million in FY2019 versus GBP 28.8 million in FY2018, reflecting a decline of 7 per cent. The proposed full-year dividend per share increased by 17 per cent to 1.55 pence in FY2019 versus 1.32 pence in FY2018. The group’s operating cash flow (net) remained flat at GBP 21.7 million for the period. The net cash stood at GBP 64.8 million in FY2019. 

Financial Ratios: Higher Profitability Margins versus Industry Median

 

The reported EBITDA Margin, Operating Margin, Pretax Margin and Net Margin stood at 30.4%, 23.7%, 23.7% and 18.5%, respectively, for the financial year 2019. Reported profitability metrics were higher against the industry median, reflecting higher revenue generated and better control over expenses as compared to peers. On the liquidity front, Advanced Medical Solutions Group Plc’s current ratio was significantly higher than the industry median of 1.56, reflecting sufficient current assets to pay short-term obligations and robust liquidity profile to tackle the uncertainty due to covid-19 outbreak. On leverage front, the debt-equity ratio of the Advanced Medical Solutions Group Plc’s was 0.05x, which was lower as compared to the industry median of 0.34x, reflecting that the company is less leveraged as compared to peers.  

Share Price Performance Analysis


Daily Chart as on 25^th June 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On June 25, 2020, at the time of writing (before the market close, at 8:34 AM GMT+1), Advanced Medical Solutions Group Plc shares were trading at GBX 225.50, down by 4.04% against the previous day closing price. Stock 52 week High and Low were GBX 324.00 and GBX 210.00, respectively.

Bullish Technical Indicator

From the technical standpoint, 14-day RSI is currently in an oversold zone, which means there is a good potential for a short term rebound in the stock price.

Valuation Methodology

Price/Earnings Approach (NTM)

 

To compare Advanced Medical Solutions GroupPlc with peers, Price/Earnings multiple has been used. The peers are Abcam Plc (NTM Price/Earnings was 48.70), Dechra Pharmaceuticals Plc (NTM Price/Earnings was 27.60), Inspecs Group Plc(NTM Price/Earnings was 31.85) and ConvaTec Group Plc (NTM Price/Earnings was 20.90). The Average of Price/Earnings (NTM) of the company’s peers was 32.26x (approx.).

Valuation Metrics


(Source: London Stock Exchange)
 
This analysis is a useful technique to decompose the different drivers of ROE. It can be further examined through three financial metrics which are: net profit margin, asset turnover and financial leverage. This analysis helps to deduce whether the company’s profitability, use of debt or assets that are driving ROE.

Advanced Medical Solutions GroupPlc Vs FTSE AIM 100 Index (5 Years)


(Source: Refinitiv, Thomson Reuters)

In the last five years, Advanced Medical Solutions Group Plc share price has delivered 50.58 per cent return as compared to 30.41 per cent return of FTSE-AIM 100 index, which shows that the stock has outperformed the index during the last five years.

Industry Outlook Dynamics

As per the study published (March 2020) by the Reports and Data, the market size for the Advanced Wound Care Market is projected to grow to USD 15.56 billion by 2027 from USD 10.8 billion in 2019, representing a compounded annual growth rate of 4.5 per cent during the period.

The growth of the advanced wound care industry is driven by the following factors:

1.  Rising incidences for wound ulcer.

2. Demand for evidence-based chronic wound therapiesin the prevalence of chronic diseases.

3. Increasing awareness that advanced wound therapy significantly reduces the healing time and hospital stay.

4. The surge in the geriatric population is directly linked with a delay in the wound healing process and demand for advanced wound care products.

Growth Prospects and Risk Assessment

Despite the global disruption caused by the pandemic, all sites of the AMS are currently operational, and the Company is meeting the commitment to serve the customers and healthcare partners worldwide. The Company keeps on launching new platforms and upgrade the old products and services related to wound care, surgical, and wound closure markets to become one of the market leaders in the healthcare market. The Group has a strong network of regional and multinational distributors and partners, which is selling the products in around 77 countries. The Company, through the wide-ranging scope, has accelerated growth organically and through acquisitions. The Group is focused on delivering superior quality products through its microbiological and analytical laboratories. The R&D is supported by Validation Engineers and Quality Engineers from inception to product development and commercialisation of products.

 The relentless investment in future growth can be seen in the image below:


(Source: Presentation, Company Website)

However, the AMS is exposed to the effects of political and economic risks. Global political uncertainty regarding trade policy also poses a risk for the Group, including protectionist measures and regulation or legislation in local markets. Moreover, the Group is anticipating higher cost and customer delays due to the Brexit implications. Also, the increasing competition and demand downturn during the COVID-19 pandemic is putting pressure on the revenue generation. Also, the business needs to reduce reliance over a few accounts for income generation.

Business Outlook Scenario

In the financial year 2019, the Group witnessed a decline in the financial performance. AMS does manage to control its operating costs for the period, which will result in improved operational and financial performance in the coming years.

All the sites of the Company are operating, despite the outbreak for covid-19. The Group has a strong liquidity position to tackle the situation. It expects the wound care and surgical businesses will return to normal levels gradually, and meanwhile, taking actions to remain in a robust operational and financial position to return to growth quickly when the markets recover.AMS’s LiquiBand® showed signs of recovery and has launched LiquiBand® Rapid™ along with main partners in the US. The Group is expected to file the approval of LiquiBand® XL in Q1 FY2021, and it will allow them to enter into larger wounds care market and will unlock growth potential in LiquiBand® business.

The Company looks forward to bringing innovation capabilities to offer a wider range of distinctive products for the clients. AMS is actively seeking acquisitions globally to increase the product portfolio and bring new synergies to increase the market share. The Group has many value-accretive projects in the pipeline, with lower risk and higher capabilities. The Company is confident towards its business model and management team to tackle the uncertain times.

Over the course of 3 years (FY16 - FY19), the company’s revenue surged from GBP 83.2 million in FY16 to GBP 102.4 million in FY19. Compounded annual growth rate (CAGR) stood at 7.17 per cent.

Based on the decent growth prospects and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation at the current market price of GBX 225.50 (as on 25^th June 2020, before the market close at 8:34 AM GMT+1), with lower-double digit upside potential based on 32.26x Price/Earnings (approx.) on FY20E earnings per share (approx.).
 
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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