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Backing a med-tech winner

A fully integrated medical technology company with a strong focus on the high-growth neonatal intensive care market is firing on all cylinders
Backing a med-tech winner
  • First-half adjusted operating profit up 22 per cent to £2.6m on 47 per cent higher revenue of £20.9m
  • Analysts upgrade full-year operating profit forecasts by 12 per cent to £3.5m
  • Integration of SLE acquisition almost complete

Crawley-based Inspiration Healthcare (IHC:123p), a fully integrated medical technology company with a strong focus on the high-growth neonatal intensive care market, has prompted analysts to upgrade their earnings estimates yet again. Last summer’s acquisition of SLE, a designer and maker of ventilators for neonatal intensive care, has been the driver.

That’s because SLE has not only enlarged the group’s global distribution network – 90 per cent of SLE’s sales are export orders with a strong focus on China, Japan, India and the Middle East – but is creating cross-selling opportunities, too. For example, by bundling consumable breathing circuits with the sale of SLE’s ventilators, and expanding market penetration into a larger installed ventilator and consumable customer base, Inspiration can introduce its breathing circuits to new customers who have been using rival products. In the six months to 31 July 2021, the group won an order worth £350,000 for its own brand Viomedex circuits from an SLE distributor in the Middle East.

Inspiration also received regulatory approval in Japan and China for its enhanced top-of-the-range SLE6000 neonatal ventilator that includes features such as enhanced High Frequency Oscillatory Ventilation (designed for use with critically ill infants) and the OxyGenie ® patented oxygen control algorithm (helps maintain infants at their targeted oxygen saturation levels). This led to a significant number of new orders in both countries, and has raised the profile of the group’s neonatal ventilator portfolio internationally.

In the UK, Inspiration’s AlphaCore patient warming system is proving very popular – sales more than doubled year on year – for the prevention of inadvertent hypothermia in neonatal, paediatric and perioperative environments. The benefits of warming are undeniable, such as improved morbidity and mortality, lower infection rates, reduced blood loss and less time in recovery.

The greater focus on higher-margin branded products – 55 per cent of the sales mix, up from 20 per cent in the first half of 2020 – is helping to drive up gross margin (from 41.4 per cent to 52.5 per cent) despite input cost pressures, which are being managed well. The combination of strong organic growth, a robust order book and increased demand across the entire group led to 12 per cent operating profit upgrades for the full year.

True, annual cash profits are expected to be flat at £5.6m on revenue of £40.6m year on year, but the prior year’s result included £7.3m of one-off Covid-19 related ventilator orders. Strip these out, and house broker Cenkos Securities pencils in 7 per cent revenue growth in the second half, a healthy underlying trend that is not yet fully priced in an enterprise valuation of £75m, or 13.4 times cash profits, after factoring in net cash of £8.6m (12.6p a share). That’s a hefty ratings discount to neonatal medtech peers, Natus Medical (41 times) and Fisher & Paykel Healthcare (23 times).

So, having seen Inspiration's share price achieve my 150p target after I suggested buying at 75p (Alpha Research: ‘Profit from a medical technology winner’, 27 October 2020), and at 120p in my last update (‘Operationally geared for outperformance’, 30 April 2021), I feel that the investment risk remains skewed to the upside. Buy.


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