(S$0.32, Fair value $0.45-0.54)
The news: We recently hosted LMA to a series of investors’ meetings. LMA is a medical consumables company that designs, manufactures and distributes its proprietary range of supraglottic airway management devices used in anaesthetic operations. The company is a global leader in its category with 75% global market share. One quarter of the world’s operations under general anesthetic employ LMA products.
Key takeaways: (1) Investors like LMA’s dominant position in the laryngeal mask range of airway management devices and its asset-light, cash-generative business model; (2) Under current CEO William Crothers who took over in Jan 2010, LMA has engineered a turnaround in its financial fortunes and reversed the declining earnings trend, through renewed focus on its core competencies in airway products in the anaesthetic arena and stringent cost controls. The result of operational improvements is reflected in a 71% y/y growth in net profit to US$13m (excluding nonrecurring items) for 9M11. This momentum is poised to continue as the company continues to ride on the increasing adoption of its devices over the traditional ET tube which is more invasive for patients; (3) The shift from reusable devices towards single-use devices and increasing penetration in emerging markets will provide the impetus for volume growth in the double-digits range ; (4) LMA’s in-house manufacturing facility at Kulim is expected to be ready by 4Q11 and will be progressively ramped up, reaching full utilisation in mid 2012. This will reduce its manufacturing costs by as much as 30% and eliminate production bottlenecks that it encountered with third-party suppliers.
Our thoughts: The stock is currently trading at 8x FY11 P/E, a large discount to global peers’ 16-20x P/E range. With sustainable growth rate at 15%, its PEG is at an attractive 0.5x. On a 10-12x P/E that better reflects its strong franchise, we estimate fair value at a range of 45-54 cents.
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