- Material order slips into new financial year
- Earnings downgrades
Crawley-based medical technology group Inspiration Healthcare (IHC:39.5p) has reduced revenue and earnings guidance for the year just ended mainly due to a delay in finalising export contracts on a £3.5mn order with a Middle Eastern client.
It is the first of potentially a series of contracts from this customer, so management was keen to make commercial terms right for the long term. Analysts at Liberum Capital point out that the delay impacted Inspiration’s manufacturing schedule, which meant an additional £1.3mn of orders slipped into the new financial year. However, £1.3mn of the £6.1mn downgrade in Liberum’s revenue estimate to £37mn reflects weaker trading for the specialist in the neonatal intensive care market.
Furthermore, the company makes a gross margin close to 50 per cent on sales, so the £3mn gross profit shortfall forced Liberum to cut its cash profit, operating profit and pre-tax profit estimates by an identical amount. They now expect a full-year pre-tax loss of £0.8mn rather than 15 per cent higher pre-tax profit of £2.3mn. The profit shortfall and the additional £2mn tied up in stock has resulted in a trebling of net debt to £6.4mn since the interim results and forced the board to request a waiver of banking covenant tests, which has been granted.
Liberum is taking a more cautious view with its 2024-25 estimates, too. Analysts have reined in revenue (from £49mn to £46.8mn), and lowered their margin assumptions, the impact of which is a 38 per cent downgrade in pre-tax profit and earnings per share (EPS) estimates to £2.9mn and 3.8p. An unwinding of the stock position should see net debt fall to £3.4mn.
The downgrades have also wiped out most of the 50 per cent paper gain after I rated the shares a recovery play, at 36p (‘Profits will soon grow at this medtech stock’, 24 October 2023). Although a forward price/earnings (PE) ratio of 10 is modest, it may take time for investors to regain their poise. Hold.
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