Surgical Innovations' continued progress

The lack of large one-off orders from industrial equipment customers was behind a 10 per cent fall in first half revenues at Surgical Innovations, a maker and designer of medical devices for invasive surgery. In turn, this led to an even sharper decline in pre-tax profits, down from £766,000 to £474,000, and prompted a 17 per cent plunge in the company's share price.

However, the reported figures fail to tell the whole story as the company's underlying business is growing at a steady rate. For instance, branded product sales were 29 per cent higher at £2.05m in the six month period after the company found new customers in South Africa and Saudi Arabia. And although the temporary reduction in orders from one large client meant that original equipment (OEM) sales were 15 per cent lower at £1.15m, business from new customers partially offset the fall. It's worth noting, too, that capital investment and research & development spend rose by £200,000 during the half to £1.36m. This reflected management's positive outlook for growth in 2012 and 2013, especially after agreeing a co-development deal with Advanced Medical Solutions, which needs an easy way of applying wound sealant internally.

In addition, an agreement with CareFusion to distribute its new retractor product, which holds organs in place during surgery, could open up a new market in different area of keyhole surgery.

Seymour Pierce says...

Buy. To reflect the slightly slower half-year position on OEM sales, we are reducing our full year 2011 revenue forecast from £8.1m to £7.6m and cutting our adjusted pre-tax profits and EPS estimate by around 10 per cent to £1.8m and 0.46p, respectively. However, we believe there will be an offsetting effect from orders during the second half and have raised our 2012 revenue estimate from £10m to £10.2m, with EPS for that year broadly unchanged at 0.6p. Surgical Innovations remains one of the better-positioned listed medtech companies, and we maintain our buy recommendation with a 13.5p target price.

WH Ireland says...

Buy. The market has taken fright at the half-year results, focusing on the headline 10 per cent decline in revenue and 25 per cent drop in pre-tax profits. This misses the point. The comparative figure includes £670,000 of revenue from a one-off engineering contract and. Critically, the higher margin Surgical Innovations Branded business has performed strongly. The full-year outlook is robust and, although we pare back our numbers slightly (EPS down by 19 per cent), the drivers for the business are as strong as ever (including product pipeline and shift from 5mm instrumentation to 3mm). On anything but a very short-term view, the share price reaction provides an excellent entry level into the stock.