Consort Medical's (CSRT) sale of King Systems, which accounted for almost a third of group revenue, has left the group in great position to increase its focus on the fledgling e-cigarette market and make acquisitions. However, we think the decision to move out of the established airways management devices market into a less established area looks risky and puts the current share valuation on shaky ground.
- Balance sheet in great shape
- Hiked dividend
- King Systems disposal
- Regulation could cause problems
- Reliant again on whims of bigger companies
- Enters a tough consumer market
It is fair to say that it came as something of a shock to the market to find out at the turn of the year that Consort was selling its airways management division, King Systems, for $170m (£105m), which includes a $50m deferred consideration. The price was a reasonable premium to the $95m that Consort Medical (Bespak in those days) paid at the end of 2005. But, in reality, that was the minimum shareholders would have demanded given that Consort has sunk nearly $30m into modernising King.
The proceeds have helped to pay off all the group's debts and gave it money to invest in its e-cigarette inhalers. But it seems perverse to give up the future sales from King Systems after spending so much management time and effort in getting the business into shape. And as boring as the division undoubtedly was, there is always likely to be a market for its range of anaesthesia airway management devices.
In addition, King Systems sold products in its own right, whereas Consort has suffered in the past from being a basic component supplier. For example, the group lost heavily from its involvement with Pfizer's Exubera insulin inhaler, which, having been billed as a potential blockbuster, was ultimately discontinued shortly after its launch following a disappointing take up. In other words, by selling King Systems, Consort again looks susceptible to the follies of its clients.
CONSORT MEDICAL | ||||
|---|---|---|---|---|
| ORD PRICE: | 768p | MARKET VALUE: | £224m | |
| TOUCH: | 763-772p | 12-MONTH HIGH: | 585p | LOW: 849p |
| FWD DIVIDEND YIELD: | 2.7% | FWD PE RATIO: | 16 | |
| NET ASSET VALUE: | 355p | NET CASH: | £37m | |
| Year to 30 Apr | Turnover (£m) | Pre-tax profit (£m)* | Earnings per share (p)* | Dividend per share (p) |
|---|---|---|---|---|
| 2011 | 132 | 17.4 | 44.7 | 19.1 |
| 2012 | 97.8 | 19.4 | 50.6 | 19.1 |
| 2013 | 101 | 19.4 | 49.9 | 19.7 |
| 2014** | 105 | 17.1 | 44.1 | 20.1 |
| 2015** | 109 | 18.0 | 46.9 | 21.1 |
| % change | +4 | +5 | +6 | +5 |
Normal market size: 300 Matched bargain trading Beta: 0.43 *Underlying PBT and EPS figures **Investec Securities forecasts (pending revisions following full-year results) | ||||
It is true that e-cigarette use has picked up quickly this year, with an estimated 1.3m users switching over from ordinary cigarettes. Currently these are classed as consumer goods, but the MHRA health regulator in the UK confirmed recently that it will look to regulate them ahead of a possible European-wide directive. This will be good for consumers as it will establish decent standards for the products, but this could restrict their sale to pharmacies, unless they can be legally advertised as over-the-counter goods.
E-cigarettes could also prove to be a bit of a fad, and hardcore smokers who are determined to quit may just pass them over in favour of cold turkey and glacier mints. Either way, by opting to supply equipment to the BAT-controlled Nicoventures with the Oxette cigarette inhaler, Consort finds itself selling into the much more competitive consumer goods market at a time when regulation may actually restrict the scope of sales.
