AMS still stands out

In our view, AMS is the leader of a relatively small pack of London-listed surgical woundcare specialists. Despite the shares’ consistently high price tag, the stock has nearly trebled over the last five years. What’s more, the company still operates in a highly-fragmented market that provides the potential for acquisitions as well as making it more likely that rivals will struggle with regulatory changes. True, the shares appear to have lost some momentum as fears persist around a weak advanced woundcare market. But a resilient set of 2018 numbers (enough to prompt a reversal in a downward trajectory of forecast earnings revisions) have us considering digging deep for a piece of AMS.

Last year’s out-turn followed a strong performance from the company’s flagship surgical glue product LiquiBand, as well as the relaunch of the LiquiBand Fix8 laparoscopic product in the second quarter. Sales of collagen and other bio-surgical devices also rose steadily, although suture sales were impacted by regulatory changes. Tight cost control, favourable currency exchange movements and a positive sales mix boosted adjusted operating margins, driving a 14 per cent uplift in adjusted pre-tax profits to £28.9m.

These results landed ahead of consensus estimates and led to a round of low single-digit upgrades to EPS forecasts for 2019. This performance looked particularly encouraging given the woes of competitors such as ConvaTec (CVEC), where a much-needed turnaround now hinges on new management or a rumoured takeover. 

But, by contrast, AMS’ own acquisition firepower has been bolstered by a new £80m revolving credit facility, as well as £76.4m-worth of net cash. It may have just completed a £19m acquisition of internal sealants specialist Sealantis in January, but the board still believes deals could escalate in light of MDR. The company’s own experiences of product recertification in Germany has reinforced the belief that regulatory “hurdles” could result in competitor product withdrawals across multiple markets, resulting in “fewer competitors in the medium term and more opportunities for stronger, higher-quality suppliers and products”. 

That said, it’s worth noting the caveat that “all medical device manufacturers are at risk of experiencing delays in product approvals and re-certifications and significantly increased demands for evidence on older products”. Indeed, the slower-than-expected timing of the recertification of its RESORBA product was sighted as a key reason for a £6.8m surge in trade debtors (amounts owed to the company); larger than the £5.7m rise in sales. Brexit-related risks exist, too. The company has built up stock levels ahead of a potential withdrawal, with inventory sucking in £3.7m cash during the year. AMS has made the appropriate changes to the packaging and labelling of its products to ensure easy cross-border travel.

AMS has also decided to change its divisional reporting, splitting itself into two: the higher-margin surgical division and the lower growth, but still cash-generative, woundcare segment. This could help improve the market's perception of the business and reflects the way analysts tend to value AMS's operations.