Opthalmologists can tell a great deal about someone’s overall health just by looking into their eyes. From retinal detachments, cataracts and glaucomas to diseases such as cancer and diabetes, many serious conditions can be detected early on via eye exams. The major benefit is that these are cheap and non-invasive compared to many procedures.
Optos was set up in 1992 after founder Douglas Anderson’s five-year-old son became blind in one eye. The firm is now the global leader in retinal diagnostics: more than 4,500 of its scanning machines are installed worldwide – the majority in America. These instruments take wide-angle, high-resolution digital images (‘optomaps’) of 82% of the retina. No other device can do this in a single picture. The devices are backed by a raft of clinical data, giving Optos a major competitive edge in this $2bn-$3bn market.
Chief executive Roy Davis’s goal is to deliver sustainable organic growth of 20% a year, with operating profit margins of 20%, by expanding geographically and across product categories.
In the first half, sales from outside North America more than doubled to $19m. Progress was also made towards securing higher recurring revenues by moving customers towards a finance lease model (in other words, renting rather than buying machines). Strong renewal rates saw receipts from future rental contracts reach $144m, even as outright sales more than doubled to $22.7m.
Davis is also excited about the new Daytona machine. This is lighter than previous models, more reliable and cheaper to make, which should open doors in both emerging markets and smaller eye clinics, which are more price-sensitive. It could be a game-changer for the firm: the device has already generated $17m in advance orders, which are scheduled for shipment by 30 September.
Optos (LSE: OPTS), rated a BUY by Jefferies
Manufacturing capacity is scaling up too, with the full product launch slated for October. The City expects 2012 turnover and adjusted earnings per share (EPS) of $185m and 21 cents respectively, rising to $190m and 28 cents a year later. I value the group on a sales multiple of two, which, after deducting net debt of $48m, generates a value of around 250p a share.
The business is largely dependent on one science (the patented optomap), which does expose Optos to the risk that rivals might develop better products. There’s also the problem of ensuring it can deliver on demand for the Daytonas. Currency fluctuations are also a risk. But overall Optos looks well placed to benefit from the opportunities in this niche area. Jefferies has a target price of 270p. The next update is due in October.
Rating: BUY at 180p (market cap £130m)
• Paul also writes the Precision Guided Investments newsletter. See moneyweek.com/PGI, or call 020-7633 3634.