AMS ready to capture elective surgery recovery

Demand for Advanced Medical Solutions’ (AMS) non-virus related equipment nosedived last year, as the huge influx of Covid-19 patients squeezed the NHS’ capacity to perform elective surgeries.

The market was not surprised when the group unveiled an annual slump in gross profits of more than a fifth to £46m. Shares were broadly flat in response - in fact, some investors were likely encouraged by the fact that revenues came in slightly above the company’s initial projections in January. That was thanks in part to a royalty payment from Organogenesis, another wound care company. 

There is not much management could have done to restore demand for its products while hospitals prioritised coronavirus treatment. Therefore management ploughed more resource into the development pipeline, pushing research and development (R&D) expenditure as a proportion of revenue up to 9 per cent, compared to 6 per cent in 2019. 

AMS' major projects made good progress over the year, including the launch of its new LiquiBand Rapid surgical glue - although the company noted that it was at a limited level because of restricted access to surgeons. The ‘XL’ version of the product is still in clinical trials, with management aiming for launch towards the end of this year. The LiquiBandFix8 glue is also undergoing clinical trials in the US and, if successful, the Food and Drug Administration is expected to file approval in 2022. This ongoing business development, on top of the £22m acquisition of Raleigh Adhesive Coatings, should help its wound care division bounce back when elective surgeries recover. 

AMS struck a relatively confident tone on the outlook, committing to a higher full year dividend and citing good progress in vaccine rollouts in its key markets. This goes some way in explaining why broker Peel Hunt now expects that pre-tax profits to rebound to £25.9m and adjusted EPS to 9.5p in 2021, close to pre-pandemic levels of £26.6m and 9.8p, respectively, in 2019. 

It is worth noting too that analysts at Peel Hunt flagged some risk from foreign exchange movements, with current spot rates implying at least a £3m reduction in revenues, and a possible £1m impact on pre-tax forecasts for 2021. Yet AMS’ ongoing commitment to R&D, and a growing portfolio of new products, arguably make it a promising pick in the long-run. The shares are not cheap relative to earnings, although still have not recovered to pre-pandemic levels. Speculative buy.