Advanced Medical Solutions Group Plc (LON: AMS): Cash generative, impressive R&D pipeline and strong profitability.

Advanced Medical Solutions Group Plc is a FTSE AIM UK 50 Index listed Company, which is engaged in designing, manufacturing, development of surgical equipment and advanced wound care products. The Company was founded in 1991 in Winsford, UK. The Company is operating out of 10 locations and currently employs 700 people. AMS sold its products and equipment across 75 countries and having more than 100 distribution partners. The Company has nine manufacturing facilities and operates across two broad business divisions – Surgical and Woundcare. On 17 March 2021, the Company expects to publish its preliminary results for the year ended 31 December 2020.

(Source: Company Website)

The Company is rendering its services to major health care companies around the world. The Company had acquired MedLogic Global Ltd in 2002 to bring technological advancement in cyanoacrylate based medical adhesives. The Group had acquired Biomatlante SA in December 2019 to strengthen AMS’s product portfolio, R&D pipeline, and market access. The Company’s R&D hubs are present in the UK, Germany, France and Israel.

(Source: Company Presentation)

Growth Prospects and Risk Assessment

The Company has bright prospects as it stepped into 2021 with a strong financial position, and well-supported by robust order book for both business segments. AMS had plans to make significant investments in Sealantis, the LiquiBandFix8^® PMA and the medical device will drive additional commercial benefits from 2022. The recent acquisition of Raleigh will enhance Company’s growth potential and wound care capabilities. The Company had sufficient financial resources to maintain R&D expenditure required to accelerate the progress of key projects.

However, the performance can be impacted with ongoing Covid-19 challenges which can disturb the cash collection, operational delivery, and transform the consumer behaviour. The business is also exposed to the risks of declining market share, insufficient focus on intellectual property protection, increased global competition, increased cost of supply, making poor integrations, regulatory risk, and cyber risk.

Industry Outlook Dynamics

Surgical Industry - According to the recent report from GlobeNewswire, the Global Surgical industry had generated USD 53.90 billion in 2019. This industry is expected to rise at a CAGR of 5.78% for the period from 2020 to 2025. Advanced Surgical treatments will create new opportunities to grow in this industry. On the geographical front, North America has the largest market share.

Advanced Wound Care Industry – With reference to the report from Medgadget, the market size of Global Advanced Wound Care market is expected to rise at a CAGR of 5.10% from 2020 to 2027 and reach USD 15.59 billion by 2027. The rising number of chronic wound cases around the world will boost up the industry. The North American Wound Care market had generated revenue of around USD 4.35 billion in 2019.

After understanding the industry dynamics, we will analyse some key fundamental and shareholders statistics of Advanced Medical Solutions Group Plc.

Recent News

On 12 January 2021: The Company has appointed Grahame Cook, as a Non-Executive Director, with effect from 1 February 2021.

On 23 November 2020: AMS announced the acquisition with Raleigh Adhesive Coatings Limited for a cash consideration of £22 million. This acquisition will strengthen AMS's position in the woundcare sector and brings strong synergies with AMS's finished product offering. Also, the acquisition expects earnings to be enhanced in 2021.

A Glimpse of Business Segments (H1 FY20)

Trading Update (for the year ended 31 December 2020, as on 12 January 2021)

• FY20 trading has been in line with earlier issued guidance.
• The Company expects revenue to be marginally below and adjusted profit before tax to be slightly ahead of the previous market expectations.
• Moreover, it has maintained a strong balance sheet, with the acquisition of Raleigh Adhesive Coatings.
• In 2020, the Company adhered to the demand of its healthcare partners, despite the challenges presented by the Covid-19 pandemic.
• In US LiquiBand®, the Company is on track and expects a strong recovery in 2021, with an increased share of end-market volumes in Q1 FY, strong order book, commercial launch of LiquiBand® Rapid™ in 2021 and the planned launch of LiquiBand® XL in 2021.
• Looking forward in 2021, the Company remains strong with a healthy order book in place.
• As per Raleigh's recent acquisition, the Company is expected to drive further commercial benefits from 2022.
• It has many value-accretive projects in the pipeline, with lower risk and higher capabilities. Therefore, the Company is confident towards the business model and management team to tackle the uncertain times.

Financial and Operational Highlights (for the six months ended 30 June 2020 (H1 FY20), as on 16 September 2020)

(Source: Company Website)

• Despite the lower revenues and challenges faced, the Company reported an underlying operating profit of £5.5 million and increased net cash to £67.9 million.
• From the perspective of operating result by business segment, Surgical revenues decreased by 19% year-on-year (YoY), Woundcare revenues were down by 20% YoY, Surgical adjusted operating margin declined 1,960 bps YoY and Woundcare adjusted operating margin reduced by 380 bps YoY.
• The Company remained cash generative and continued to invest in R&D while maintaining dividend payments.
• In H1 FY20, the Company maintained supply to hospitals and healthcare providers and retained the employee base in safe conditions. The trading stood in line with expectations and progress continued on all core projects with increased investment in R&D.
• It continues to gain approvals for new geographies and got first approval for LiquiBand® and LiquiBandFix8® in India.
• AMS maintained the interim dividend per share of 0.5 pence and expects to return to dividend growth once the business returns to normal in the near future.
• The trading stood in line with expectations and progress continued on all core projects with increased investment in R&D.
• Furthermore, AMS has started experiencing signs of demand recovery in some markets.

Financial Ratios (H1 FY20)

Share Price Performance Analysis

On 04 February 2021, at the time of writing (before the market close, at 9:05 AM GMT), Advanced Medical Solutions Group Plc shares were trading at GBX 233.00, down by 0.85% against the previous day closing price. Stock 52-week High was GBX 288.00, and Low was GBX 190.00, respectively.

From the technical standpoint, 20-day SMA (231.60) and 50-day EMA (231.40) support the upside potential.

In the past six months, Advanced Medical Solutions Group Plc’s stock price has delivered a positive return of ~21.57% return as compared to ~36.24% return of FTSE AIM UK 50 Index and a negative -12.39% return of FTSE All Share Health Care Equipment and Services index, which shows that the stock has outperformed the benchmark sector but underperformed the benchmark index.

In the last ten years, Advanced Medical Solutions Group Plc share price has delivered around 226.39% return as compared to the approximately 87.08% return of FTSE AIM UK 50 index, which shows that the stock has outperformed the index during the last ten years.

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Business Outlook Scenario

The Company had delivered a resilient trading performance during FY20. AMS had anticipated its FY20 revenue to be around £86.5 million. The Company had managed to meet the demand of its healthcare partners during 2020 despite various operational headwinds caused by the Covid-19 pandemic. The Covid-19 pandemic had disrupted the global surgical & wound care market and caused a substantial reduction of treatment volumes. Some of the hospital activities are halted due to reduced access to the customers. However, the increasing pace of Covid-19 vaccination programmes will resume the hospital activities to normal levels.

The business performance of US LiquiBand^®  was anticipated to recover due to healthy order book and Commercial launch of LiquiBand^® Rapid™ in 2021 following its approval. The Company will treat large wounds through its launch of LiquiBand^® XL in 2021, and it will file 510k in March 2021. AMS had accelerated its progress regarding the US clinical trials of LiquiBandFix8^® as it had completed more than 50% of the total required patient procedures. The filing for the device is expected in 2022. The Company had acquired Raleigh Adhesive Coatings in November 2020 to bring substantial commercial synergies and achieve organic revenue growth.

(Source: Company Presentation)

Considering the healthy order book in both Business Units, expectations to drive additional commercial benefits from 2022, synergies between AMS and Raleigh, new product approval in Europe for Silicone PHMB Foam Dressing, resilient performance, solid momentum on strategic priorities, maintained investment in R&D initiatives, sound business model, decent operating and financial performance, robust cash generation capabilities, improved net margins, sufficient liquidity, entered in India (with the first approvals for both LiquiBand® and LiquiBandFix8®), 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 233.00 (as on 4 February 2021, before the market close at 9:05 AM GMT), with lower-double digit upside potential based on 29.75x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

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

*The dividend yield is subject to change as per the stock price movement.

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