Advanced Medical Solutions Group PLC (LON: AMS) – Coping well with the changing demand patterns while continuing to invest in R&D and regulatory projects.

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, it employs around 700 people to serve in about 77 countries worldwide.

On 16 September 2020, the Company expects to announce interim results for the six months ended 30 June 2020.

 (Source: Company Website)

Key Fundamental Statistics

Industry Outlook Dynamics

According to the recent publication from Markets and Markets, the global advanced wound care market is projected to reach US$16.5 billion by 2025 from US$10.3 billion in 2020, representing a CAGR of 9.8%.

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

• Rising incidence of diabetes.
• Rising incidences for wound ulcer.
• Demand for evidence-based chronic wound therapies in the prevalence of chronic diseases.
• Increasing awareness that advanced wound therapy significantly reduces the healing time and hospital stay.
• The surge in the geriatric population is directly linked with a delay in the wound healing process and demand for advanced wound care products.

Further growth opportunities can be expected with the withdrawals of competitor product in surgical and wound care markets as a result of the introduction of the Medical Device Regulation.

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. Moreover, it 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. It is focused on delivering superior quality products through 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. Moreover, the Company 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. Further, the business needs to reduce reliance over a few accounts for income generation. Adjacently, the Company has been witnessing a tepid demand for dental procedures, surgeries, and chronic wound care due to the disruption caused by the COVID-19.

(Source: Presentation, Company Website)

Key Shareholders Statistics 

Recent Regulatory Developments

4 August 2020: LiquiBand® received UK and US patents for providing protection until 2034. The granted patents will strengthen the core markets.

10 June 2020: The Group experienced 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 May 2020: Peter Allen decided to step down, with effect from 6 May 2020, from the Audit Committee.

A Glimpse of Business and Geographic Segments

AMS bifurcates the operations into two divisions - Surgical and Woundcare. 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)

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)

Trading Update (for the six months ended 30 June 2020, as on 9 July 2020)

Inevitably, the Company was impacted by the COVID-19 in H1 FY20, but it has made significant progress in several areas, such as key product approvals and the improved end sales demand for US LiquiBand®. During the period, it got the approval of LiquiBand® and LiquiBand® Fix8™ in India. In Q2 FY20, the Company’s revenue was impacted by approximately £15 million due to Covid-19 disruptions. Both Business Units (Surgical and Woundcare) were affected by Covid-19 pandemic. The Woundcare business also being affected by some customers' Brexit preparations in 2019. Hence, the Woundcare division expects aggregate sales to be approximately £39 million in H1 FY20, which is less than the same period of last year (H1 FY19: £48.7 million). AMS witnessed an encouraging movement, with the first revenue contribution from Biomatlante with an approval and launch of LiquiBand^® Rapid™.

The Company has continued to invest in R&D and regulatory projects, which would provide a platform for growth when end markets recover. Currently, AMS has been operating the factories, with lower volumes. In H1 FY20, the Board expects adjusted profit before tax to be in the range of £5 million to £6 million. Despite the pandemic disruption, Advanced Medical Solutions Group has remained in a robust financial position, with net cash of £68 million, an increase of £4 million from the financial year 2019. The Company has shown a sign of recovery in some markets. Moreover, the current internal forecasts suggest that the overall impact on revenues will be around £7 million in Q3 FY20 and approximately £3 million in Q4 FY20.

Financial and Operational Highlights (for the year ended 31 December 2019)

(Source: Company Website)

• 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.
• FY19 proven to be a challenging year for the Company, with the previously reported downturn of US LiquiBand® and a third-party sterilisation failure at the end of 2019, which was resolved in early 2020. However, it had shown good growth in other areas of the business.
• It has substantial upside potential in the internal sealants market and R&D pipeline after the acquisition of Sealantis and Biomatlante. Further, the Company is actively seeking acquisitions globally to increase the product portfolio and bringing new synergies to increase the market share.
• Overall, the Company is performing resiliently, with a strong balance sheet and robust liquidity position.

Financial Ratios – Strong Profitability Margins versus the Industry Median 

 

Reported profitability metrics for the financial year 2019 were higher against the industry median, reflecting higher revenue generated and better control over expenses as compared to the industry. Also, it has decent fundamental metrics as it has maintained an EBITDA and Pre-tax margin above 20% for the last many years.

The ROE recorded by the Company in the past several years was considerably above 8%. On the liquidity front, Advanced Medical Solutions Group Plc’s current and quick ratio was significantly higher than the industry median, 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 was 0.05x, which was significantly lower as compared to the industry median of 0.34x, reflecting that the Company is less leveraged as compared to the industry. 

Share Price Performance Analysis

Daily Chart as on 3 September 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On 3 September 2020, at the time of writing (before the market close, at 9:00 AM GMT+1), Advanced Medical Solutions Group Plc shares were trading at GBX 227.00, down by 1.30% against the previous day closing price. Stock 52-week High was GBX 315.00 and Low of GBX 190.00, respectively.

Bullish Technical Indicators

From the technical standpoint, the shares were trading above the short-term support level of 20 and 50-day simple moving average price. Also, 90-day RSI is currently in an oversold zone, which means there is a good potential for a short term rebound in the stock price. MACD line is placed above the central line, indicating a bullish setup.

Advanced Medical Solutions Group Plc Vs FTSE AIM UK 50 Index (1 Month)

(Source: Refinitiv, Thomson Reuters)

In the last one-month, Advanced Medical Solutions Group Plc share price has delivered 17.54% returns as compared to 8.79% returns of FTSE AIM UK 50 index, which shows that the stock has outperformed the index during the last month.

Valuation Methodology: EV/Sales Approach (NTM) (Illustrative)

To compare Advanced Medical Solutions Group Plc with peers, EV/Sales multiple has been used. The peers are Dechra Pharmaceuticals Plc (EV/NTM Sales was 6.49x), Abcam Plc (EV/NTM Sales was 9.30x), ConvaTec Group Plc (EV/NTM Sales was 4.50x), Inspecs Group Plc (EV/NTM Sales was 4.11x) and Tristel Plc (EV/NTM Sales was 6.02x). The Average of EV/NTM Sales of the Company’s peers was 6.10x (approx.).

Business Outlook Scenario

AMS has started experiencing signs of demand recovery in some markets and expects lesser sales impact in H2 FY20. The pace of recovery will vary for different types of surgical procedures and different geographies. Given the potential for second waves of COVID-19 infection, the Company could not provide full-year guidance for FY20. However, the overall impact on revenues will be nearly £7 million in Q3 FY20 and £3 million in Q4 FY20. Nevertheless, AMS is coping well with the changing demand patterns and pleased to witness recent market share gains for LiquiBand® in the US, following the launch of LiquiBand® Rapid™ in the Q1 FY20.

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. It has many value-accretive projects in the pipeline, with lower risk and higher capabilities. The Company is confident towards the business model and management team to tackle the uncertain times. Overall, the balance sheet remains strong, and the Company will continue to invest in R&D and regulatory projects to emerge strongly when end markets recover.

(Source: Presentation, Company Website)

Advanced Medical Solutions Group Plc witnessed a CAGR growth of 10.53% in revenue over the period FY15 to FY19, while net profit (from continued & discontinued operations) recorded a CAGR growth of ~7.59% during the same period.

Considering the signs of recovery, decent operating & financial performance, high level of cash generation capabilities, decent profitability margins, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Advanced Medical Solutions Group at the current price of GBX 227.00 (as on 3 September 2020, before the market close at 9:00 AM GMT+1), with lower-double digit upside potential based on 6.10x EV/NTM Sales (approx.) on FY20E Sales (approx.). 

 

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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