Has anyone in your family had keyhole surgery? Ten years ago,
I was on a sailing holiday in Turkey. It was memorable on two counts. Firstly, I proposed to my girlfriend and, to my amazement, she accepted, and secondly my new fiancée unfortunately fractured her cheekbone in a freak accident. We flew back to the UK for the operation. The surgeon made a minute incision and pushed the cheekbone back into place; neither of us could see any evidence of the operation. The scar tissue also fully healed after a couple of months. Brilliant.
Clearly, the benefits of keyhole surgery over standard operations are compelling: reduced tissue damage, faster recovery times and lower costs. Nowadays, Minimally Invasive Surgery (MIS) is also used for gallbladder/kidney transplants and obesity-related diabetes.
Surgical Innovations (Aim, SUN: 2.6p)
Surgical Innovations Group (SUN) is a designer, manufacturer and seller of innovative medical instruments used for keyhole surgery. It’s been trading successfully since 1992 and employs more than 40 people. In 2005, sales increased by 33% to £4m, while earnings per share (EPS) doubled to 0.16p. Second-half turnover grew to £2.6m and generated EPS of 0.12p, thus representing a substantial jump on the first half of 2005. What’s more, the firm ended the year with a record order book of £745k. Impressive stuff.
Underlying top-line growth in MIS was 8% and the board stated that they were “confident this rate can be substantially increased”. For instance, last year, management decided to make use of its existing patented technology to explore new opportunities outside of its core medical field.
In September 2005, it won a £800,000, ten-year exclusive contract with Rolls-Royce to develop MIS products aimed at jet-engine repairs. The benefit to Rolls-Royce is that the company can now inspect hard-to-access components of an aircraft without having, for example, to strip down an engine – thus saving considerable time and cost.
With this deal in the bag, Surgical Innovations is now actively seeking other similar deals in the energy, nuclear, petrochemical and offshore sectors. Due to its small size (market cap of only £7m), there is no publicly available broker research on the company. Personally, this does not worry me – in fact, I like it, as it appears that the market has so far not identified this hidden gem. At 2.6p, the shares trade on a historical p/e of 16. But I believe this masks the underlying value of the company. For instance, if it repeated its second-half of 2005 performance for both half years in 2006, then EPS would be 0.24p with the p/e multiple dropping to 11. To my mind, this is too low for a business with patented technology that offers such significant growth opportunities.
Another valuable asset going forward is the firm’s carried-forward tax losses of £17m. Net debt stood at £440k on 31 December 2005.
Recommendation: BUY at 2.6p
Although a relative midget in the overall healthcare market, Surgical Innovations owns some unique technology in a high-growth niche sector. The main downside is that it’s having to substantially step up its capital expenditure in order to stay ahead of the game.