This healthcare company may soon see a step change in its profitability.
Because of the popularity of this series of Alice's AGMs I am often stopped in the streets. The two most common questions I get asked are:
- Should I wear a dinner jacket when attending an Annual General Meeting?
- What is the difference between an analysts' presentation and an AGM?
With regard to the former, possibly a DJ is a bit extreme but looking smart is recommended, wearing jeans and a white T-shirt is a bit naff.
As for the second question, analysts presentations are even more regimented than AGMs. They take place on the day the prelims or the interims are announced and they usually kick-off at 9.30 am. The venue is typically the offices of the plc's public relations company, always in the centre of London, and they last precisely an hour because the analysts need to get back to their offices to write their report before noon.
A PowerPoint presentation is given by the CEO and Finance Director. Sometimes the chairman attends, the deciding factor usually being whether he is earning over £50,000 (if so he will turn up and look serious). The analysts will only ask a few questions when the presentations have been completed because they are keen to head back to their offices. Analysts are predominantly but not exclusively male.
Private investors are never allowed to attend analyst presentations (the sophisticated banter would fry the brains of private investors) but there is sometimes an opportunity to attend an investors' lunch. Attendees are usually either individuals with good contacts with the City or those sad people who have attended a number of AGMs and as a result have shown a deep interest in the company.
The format is similar to an analysts presentation, a PowerPoint presentation will take place, usually while the sandwiches are being devoured (experienced directors can usually eat sandwiches and present at the same time).
Let's do lunch
This week I was lucky enough to attend an investor lunch for the catchy-titled Immunodiagnostic Systems Holdings (LSE: IDH), a company that I have followed for a while. Okay, I will come clean, IDH is not an oil E&P company but in a (desperate) attempt to keep commodity-obsessed boys and girls reading I will highlight the following similarities:
- IDH operates in a critical and very big industry. IDH designs, manufactures and sells immunoassay kits which are used to measure or detect particular substances with a sample, thus aiding the diagnosis or monitoring of a disease or providing information for research studies. In 2007 the immunoassay sector of the IVD market was estimated to be worth US$10bn.
- IDH specialises in the immunoassay equivalent of 'heavy oil'. Okay, this is contrived but bear with me. IDH specialises in Vitamin D, which has applications for bone, cartilage and hypertension. (Figures released last year by a number of the largest reference laboratories in the USA showed that Vitamin D testing has increased by over 75%, and more recent data indicate that the French market has more than tripled in less than two years.)
- As I type this, IDH is drilling for oil and expects to hit a 'gusher' in the near to medium term. A gusher in this context is the IDS-iSYS, an automated immunoassay system that was launched at the end of February 2009. Details are sketchy at the minute but when the interim trading update is announced (interim end date being 30 September) we should learn more about how many machines have been placed with customers. So far the company has said that satisfaction rates are running at 100%.
If I can switch analogies, we are talking the razor-blade business model. Once the IDS-iSYS has been installed, margins increase substantially. The razors may be expensive to produce and may be sold at a low margins, but the razor blades are very cheap to make and their sales price is high because of the intellectual property within the blade (the biomarker).
Depending on who one talks to, the annual throughput of each model could be £40,000, £50,000, £60,000, whatever. And most of revenue flows to the bottom line because of the high margins.
Profits could soon ramp up
IDH's broker, Brewin Dolphin, is expecting a step-change in profitability. Its adjusted earnings per share (EPS) forecasts are:
- Year ended 31 March 2009: 19.3p (actual)
- Year ending 31 March 2010: 24.3p (forecast)
- Year ending 31 March 2011: 39.3p (forecast)
And the historical record of IDH is not bad either:
- Group sales 2000-2005: Compound annual growth rate (CAGR) was 46%
- Profit before tax 2000-2005: CAGR was 86%
The current market cap is £71m. Adding debt of £10m gives an enterprise value of £81m. Annual revenues last year were £25m.
Recent placings
A placing in December 2008 was badly handled, with 2.4m shares issued at 130p. The current share price is 265p, and the placing will have a dilutive impact on EPS going forward. The placing was needed because IDH only realised at a late date that the IDS-iSYS instruments would need to be placed rather than sold. This was something that had not previously been signalled to the market, which had assumed that the relatively low cost of the instrument equated to the instrument being sold outright.
The launch of the IDS-iSYS has come about because of the Biocode Hycel acquisition announced in 2007 -- which was not only large in the context of IDH, but as it was located in France also presented language, cultural and logistic issues. One division of Biocode Hycel has been sold -- a protracted exercise -- and the proceeds will be received over a four year period. Meanwhile, a major reorganisation of the rest of the European operations has taken place. The IDS-iSYS will be manufactured at Liege.
At the time of the Biocode Hycel purchase in August 2007, the roll-out of the IDS-iSYS instrument was expected to be much quicker, as evidenced by the placing price of the shares used to partly fund the acquisition (the placing price was 240p, just below the current share price).
It's all about faith
We are still at the anticipation stage of the life of IDH. Until we have firm figures of instruments placed and evidence that the 'razor blades' sold are in line with expectations, shareholders need to have faith. So for those who are yet to be convinced, it is a case for setting your watches for the end of September/beginning of October to see whether IDH still expect to sell a significant number of IDS-iSYS in the medium term. Then would probably be a time to consider signing up for what could be an exciting ride.
Note that there are some very big players in the immunoassay market. If they turned their sights on IDH, it would be an unequal contest. As the CEO has said "we do not wish to stray into the fiercely-competitive automated commodity IVD sector occupied by the Top 5 multi-billion dollar protagonists".
Getting back to the lunch, a most civilised occasion, in attendance:
- Roger Duggan, CEO. He's the man with the contact book and has built up a team that he is proud of. He has, for example, great hopes of his new team in the States where FDA 510(k) application for the IDS-iSYS has been submitted, which the US launch anticipated in late 2009.
- Ian Cookson, the very hands-on COO
- Paul Hailes, an FD without a single grey hair
The directors own 14% of the equity.
Hopefully one day AGMs will resemble investor lunches, where presentations are the norm and private investors are spoilt for choice with regard to the buffet.
One last word on IDH: all private investors should have a soft spot for a company whose non-executive chairman states that 'whilst I will not argue against the rationale for the fundraising the process itself was needlessly painful both in terms of professional hangers-on that are used and also the placing process itself.' For the avoidance of doubt, Brewin Dolphin, the Company's NOMAD, were taken on post the December placing.
Discussion board poster AliceInWonder1 is a serial AGM attendee and is keen to encourage other private investors to take a more 'hands on' approach with their holdings. He owns shares in Immunodiagnostic Systems Holdings.
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