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Surgical Innovations falls short

RESULTS: Surgical Innovations needs a busy second half to cover a shortfall during the first six months
September 18, 2012

A sharp decline in revenue from original equipment manufacturer (OEM) products meant half-year numbers from Surgical Innovations (SUN) were some way short of City estimates. Still, OEM sales are expected to come back in the second half and, with booked orders for 2012 already exceeding last year's total, the keyhole surgery group is set to hit full-year forecasts

IC TIP: Buy at 8.62p

Surgical blamed the timing of key orders for a 28 per cent drop in OEM sales from £1.2m to £0.9m. It's disappointing, but these orders are typically less predictable and there's enough visibility for management to predict a pick up over the next few months. That should get OEM revenue somewhere near last year's total of £2.8m, but it's clear why Surgical wants to focus on its branded business. Sales of these products grew 9 per cent to £2.1m following a record second quarter - almost two-thirds of that was from higher-margin disposable parts. And there's increasing demand from the US. The country accounts for 30 per cent of group sales, but management expects this to rise to nearer 50 per cent in time. New products will contribute, too - orders for own-brand 3mm scissors are already in the bag and pre-production devices for minimally invasive hip surgery will be launched later this month.

Strip out £0.3m of restructuring costs and group pre-tax profit held steady at £475,000. Broker Merchant Securities expects profits of £2.4m for the full-year, giving adjusted EPS of 0.6p (from £1.7m and 0.4p in 2011).

SURGICAL INNOVATIONS (SUN)

ORD PRICE:8.62pMARKET VALUE:£34.7m
TOUCH:8.5-8.75p12-MONTH HIGH:12.4pLOW: 8p
DIVIDEND YIELD:nilPE RATIO:22
NET ASSET VALUE:3.2p*NET DEBT:13%

Half-year to 30 JunTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
20113.200.470.12nil
20123.020.180.07nil
% change-5-62-42-

*Includes intangible assets of £5.9m, or 1.5p a share