Every week, MoneyWeek’s share-tipping expert Paul Hill suggests a share for the brave. After a brutal two years, four new products could transform this healthcare stock’s fortunes.
Gamble of the week: Healthcare Enterprise (AIM: HCEG)
The past two years have been brutal for Healthcare Enterprise’s shareholders. The core business, Crest Medical, is the UK’s largest distributor of occupational healthcare and first-aid products, which are made in Asia and distributed from its Warrington site. Customers include Boots and Kimberley Clark. Losses at the unit rocketed in 2005, after a string of acquisitions led to integration, pricing and supply-chain problems. A new management team has since stabilised performance, hacking costs by £1.7m a year, slimming down working capital (defined on page 40) and cutting capital spending. The unit is now trading at a near break-even, on annualised sales of around £12m.
But what’s particularly appealing to investors is that the firm also owns four new products that could transform its fortunes. Its patented Ebiox decontamination and disinfectant products received US approval from the Environment Protection Agency earlier this year. The range includes wipes and sprays to clean surgical instruments, which offer several advantages over conventional products. Not only do they work on bacteria such as the MRSA superbug, but they can also be used more often, as they do not contain alcohols, chemicals or skin irritants.
Applications for individual US state approvals have been submitted, with authorisation expected by autumn. Once secured, Healthcare Enterprises will look to sign licence deals for supplying Ebiox to the vast US healthcare market. Separately, the firm has a $4.5m five-year deal with Sultan for the distribution of Ebiox for dental care applications outside North America. On top of this, it has another three potential money-spinners – though not as well developed as Ebiox – for infertility treatment and endoscopy examination.
Clearly this small, loss-making business is not out of the woods yet, but if the Crest turnaround is successful, and Ebiox takes off, its current market cap of £13.5m will look very cheap indeed. House broker Numis expects the company to be profitable in 2008, and has set a 9p price target on the stock with a buy rating. At the last placing in February (raising £1.6m), the directors as a group subscribed for £100k worth of stock at 6p. Net debt stands at around £2m.
Recommendation: SPECULATIVE BUY at 4.43p