This week’s gamble is a minnow in the medical devices pond, especially when compared to heavyweight peers such as America’s Baxter Healthcare. The company has been trading successfully since 1992, employs more than 40 people and, importantly in these volatile times for small caps, is profitable and cash generative.
Surgical Innovations (Aim:SUN)
Leeds-based Surgical Innovations (SI) designs and manufactures medical instruments, such as scissors and laparoscopic port access systems, which are mainly used for keyhole surgery.
The benefits to patients and hospitals of minimally invasive surgery for standard operations are three-fold: reduced tissue damage, faster recovery times and lower costs. As such, this niche market is expanding rapidly. The technology is being deployed in many other types of applications, from simple exploratory operations and standard plastic surgery to complex operations, such as gallbladder and kidney transplants and obesity-related diabetes.
Even though Surgical Innovations still makes devices for third parties (such as Teleflex Medical), the company is increasingly developing its own proprietary science.
Its latest innovation has been the YelloPort Plus, a laparoscopic device that combines re-usable parts with disposable accessories, thus saving substantial costs compared to its rivals. The product has been successfully patented, received approval from the American Food and Drug Administration, and was launched in July 2007. Encouragingly, from a standing start the product’s sales in the second half of 2007 were an impressive £644,000. But this could be a drop in the ocean: the group’s ground-breaking deal with MGM Med Inc last year to appoint it as the master distributor in America could significantly improve hospital penetration rates.
As far as the outlook goes, house broker Hanson Westhouse expects 2008 sales and underlying EPS to come in at £5.3m and 0.19p, rising to £6.0m and 0.22p in 2009. At the end of April the chairman, Doug Liversidge, commented that “the laparoscopic sector shows no signs of slowdown and […] the potential for new product development and associated revenue streams is considerable”. If he is right, then I could see these estimates being upgraded as the year progresses.
Finally, the balance sheet is also robust with net cash as at the end of December of £2.7m – following last year’s £4m placing at 3.5p – together with about £15m of carried-forward tax losses, which might become attractive to potential trade buyers.
Although there are plenty of risks relating to micro-caps, I would advise the more adventurous investor to tuck some shares away for the medium term.
Recommendation: speculative BUY at 2.4p (market cap £9m)
• Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments