Australia | Jun 21 2007
By Chris Shaw
For medical products group ITL Limited (ITD) the current financial year has been a year to forget as problems in supply the needs of its clients have damaged relationships and impacted on revenues and consequently earnings.
The share price has reacted accordingly and the stock has lost about one-third of its value since March, raising the question as to whether it now represents good value. According to Intersuisse the answer is yes, the broker rating it as a Buy with a price target of $0.61.
In its view the issues that have befallen the company, stemming mainly from delays brought on by the use of third party for sterilization services, have now been addressed. It expects the move by management to purchase its own sterilization equipment, the implementation of which was itself delayed due to damage during shipping, will facilitate the fixing of its supply chain and customer relationships that were damaged by the delays.
Longer-term it sees potential for additional expansion of operations, as while the current Malaysian facility is operating at full capacity another facility is being commissioned and should be ready to begin operations in 12-18 months.
The broker also points out management has confirmed earnings for the current year, with EBITDA (earnings before interest, tax, depreciation and amortization) expected to be within a range of $3.2-$3.6m and net profit in a range of $1.9-$2.2m. On its numbers the broker expects earnings per share of 1.7c this year, increasing to 3.7c in FY08, which would put the stock on what it considers an excessively low FY08 P/E (price to earnings ratio) of 10.8x.
When combined with its valuation range of 61-80c, the broker suggests at current prices the stock is simply too cheap.
Citi however regards the stock as about fair value at current levels, rating it as a Hold and reducing its target price to $0.42 from $0.69. It argues the fallout from the sterilization issue has been greater than the market had anticipated, as the end result is likely to be revenues falling by around 30% half-on-half, bringing down full year EBITDA to around $3.3m against its forecast of $5.3m.
Not only that, the broker expects there to be some fallout flowing through into FY08 as it expects it will take time to restore operations to their previous level. It also anticipates the company will have higher costs from freighting out customer orders, while the latest update from management implies the timetable for the new Malaysian facility is stretching out from 12 months as indicated in March to 12-18 months from now.
As a result the broker doesn’t see earnings recovering until the second half of FY08 and so has adjusted its forecasts accordingly. In terms of sales the company now sees FY07 generating $34.1m against $36.9m previously, in FY08 $40.9m against $47.2m previously and in FY09 $48.2m against $57.1m previously, while its profit forecasts have been cut to $2m this year from $4.3m, $4.6m in FY08 against $7.6m previously and $6.2m in FY09 against $10.2m previously. In EPS terms this equates to 1.8c this year and 3.7c in FY08, broadly in line with the estimates of Intersuisse.
Taking a longer-term view the broker sees a potentially bright future for the company, noting there are a number of possible targets for expansion in Asia and the balance sheet is in solid shape following a recent placement to raise $8m, but as with any company to disappoint on guidance there will need to be proof performance has recovered before the market regains its confidence in the outlook. Citi is the only broker in the FNArena database to cover the stock.
Shares in ITL today are unchanged at $0.38, which compares to a trading range over the past 12 months of 25.5c-64c. At current prices the company has a market capitalisation of around $47m.