Medical devices companies are often favoured over pharmaceutical companies by investors because they perceived to carry less risk during the initial development phases. For examples, devices require a shorter testing period and can consequently make it faster to market. However, devices companies can be difficult to manage as the situation at retinal imaging company Optos (OPTS) proves. Optos is about three years into a turnaround plan, but the company's poor recent results bring into question how much progress has actually been made. Add in high operational gearing that makes profits highly vulnerable to small changes in top-line revenue, plus a business structure that has a reputation for being difficult to manage, and it isn't hard to understand why investors have been exiting in growing numbers.
- New products not far from market
- Cost cutting
- Disappointing acquisition
- Sales volumes not meeting forecasts
- Operational gearing affecting performance
- Tough economic conditions in Europe
The interim results showed how the company's natural operational gearing allowed a 15 per cent fall in revenues to $73m (£47.72m) to turn a $6.8m operating profit into a $600,000 loss for the half, despite ongoing cost cutting. Part of the problem for Optos is that it going through the process of trying to persuade customers who 'rented' retina scanning machines with an operating lease to either buy them outright, or shift over to a finance lease. The advantage to the company of a finance lease is that Optos carries less risk while outright sales mean Optos can book all its income in one go, which helps to boost the financial results. That effort is taking time, there are 621 operating leases remaining.
OPTOS (OPTS) | ||||
|---|---|---|---|---|
| ORD PRICE: | 128p | MARKET VALUE: | £92m | |
| TOUCH: | 126-128p | 12-MONTH HIGH: | 228p | LOW: 110p |
| FWD DIVIDEND YIELD: | nil | FWD PE RATIO: | 7 | |
| NET ASSET VALUE: | 165¢* | NET DEBT: | 47% | |
| Year to 30 Sep | Turnover ($m) | Pre-tax profit ($m) | Earnings per share (¢) | Dividend per share (¢) |
|---|---|---|---|---|
| 2010 | 106 | 12.7 | 20.0 | nil |
| 2011 | 143 | 24.4 | 32.1 | nil |
| 2012 | 193 | 23.4 | 24.6 | nil |
| 2013** | 158 | 6.40 | 4.20 | nil |
| 2014** | 170 | 27.2 | 26.3 | nil |
| % change | +8 | +325 | +526 | - |
Normal market size: 1,000 Matched bargain trading Beta: 0.65 *Includes intangible items of $45.7m or 63¢ per share **Numis forecasts £1=$1.51 | ||||
In the meantime the pressure is on the new Daytona imaging device to deliver the profits. Unfortunately, installations of the Daytona machine, which is a much smaller and more practical than its predecessor, have been running behind schedule. The company has installed about 400 Daytonas so far this year, with about 220 sold outright, but that is still well off the 1,000-1,200 installations is targeting this year to deal with the decline in operating income from its older P200 machine estate. If it doesn't hit the target - itself well down from previous forecasts of 1,500 machines - then further downgrades are inevitable. Software issues, which have now been resolved but hampered initial sales of Daytona, means there is significant ground to make up. Meanwhile the price tag of the company's more expensive 200Tx devices is proving off-putting at a time when capital is tight with broker Numis calculating that lower sales of the product accounted for half the $10m revenue shortfall to its first-half predictions.
The performance of Optos' recent acquisitions since is also a matter of concern. While Optos should soon benefit from new product launches following its $17.5m purchase of Opko Health in 2011, results so far have been disappointing. And whether Optos can boost its position through further acquisitions is a moot point as the balance sheet is looking rather stretched - net debt rose by $7.6m in the 12 months to the end of March to $55.8m.
