Gyg Share Discussion Threads

[pachiaammos] 23/6/2005 14:24

Thanks, Maddox. Your cc) is an especially good point, and the others make sense too.

[shirishg] 23/6/2005 14:04

Post removed by ADVFN

[maddox] 23/6/2005 14:03

Pachiammos,

Thanks for your cautionary stance, I tend towards the optimistic and I appreciates a contrary view. However, let me attempt to persuade you that your fears are unfounded or at least that the reward is worth the risk:

aa) Interest cover. The interest rates would have to increase massively to affect the risk profile. Are you suggesting that Gyrus should have used equity to fund the acquisition?

bb) Continued US Health Market Growth? Market growth in the US and elsewhere is underpinned by long-term demographic trends - there is a growing affluent grey market throughout the developed world that will want and require to consume healthcare.

cc) Gyrus is not actually dependent upon this growth. Keyhole surgery is displacing open surgery - its quicker, cheaper and the patient outcome is better.

dd) The Dollar risk? This has already had the effect of depressing Gyrus' growth rates (with respect to previous results translated at a 'better' rate.) This effect declines overtime unless the Dollar falls further each period. To repeat the US$ decline £stg would need to rise to US$2.40/£. This currency risk is far from specific to Gyrus.

ee) Market valuation of growth. Your comments are well made, the market is not valuing businesses at stratospheric rates any more. However, you cannot defy the cumulative effect of growing revenue at high-teens rates year on year.

Regards, Maddox

[pachiaammos] 22/6/2005 17:23

Good points, Maddox and Optimum. I take in particular the point about the cash flow.... though it looks to me that in 2005 the interest cover will be bad (operating cash flow = 2x or at best 3x interest payments) and you will be hoping that it goes up to 4 or 5 as the reorganization benefits kick in.

Certainly the profit visibility on Gyrus is better than in some other co's relying on the US hospital products market, e.g. BII and OXB.

On optimistic assumptions this share price will be 2 or 2 1/2 times its current level in 3 years' time. The main assumptions are (1)(a) that the management can deliver on their promised synergies, both boosting the top line and cutting costs; (1)(b) that the company will be seen as expected to hold or increase market share beyond the transitional period of reorganization; (2) that the US hospital products market (a) continues to grow by leaps and bounds, and (b) is still expected when we get to 2008 to continue booming;
(3) that the dollar is no weaker than stable against the £; and
(4) that US$ interest rates do not go up much, especially not in the next year or two.
Of these I regard 2(b) as the most dodgy. If that bit of the outlook falters, the stockmarket will not sustain stratosperic p/e's on US-dependent healthcare companies. Will the market for ENT equipment, urology, etc, just grow and grow or will it, like IT, hit a ceiling or at least a gentler upward slope?

This is one of those companies that can produce excellent-looking figures and still disappoint the market. 25%pa eps growth just won't do here from now on. Compare MTO. 5 years ago it was growing at 30% pa. In recent years its eps growth has been in the high teens -- still very good, but the share price fell by half to adjust to the lower expectations and is even now only about back to its 2000 level.

[maddox] 22/6/2005 00:14

Pachiammos,

Thanks for your comments, points worth considering. My paras follow yours.

Regarding your concerns about the merger accounting. Its always comforting when I see that the reported 'cash profit' from the cashflow is close to the reported P&L Profit. With Gyrus the cash profit has always exceeded the P&L profit due to the write-off of goodwill - add that back and it reconciles.

Gyrus has got an experienced management team and have successfully integrated US business before, rationalised operations, integrated units and made operational savings. They have also rationalised sales forces - a very delicate process - and kept the sales rolling in.

The management cost of running a larger company are defrayed over a larger turnover. The span of control of an individual manager does not need to change dramatically whatever the size of the organisation. Removal of duplicated HO function should lead to an overall cost saving.

The increase in debt should be welcomed, the cashflow can support it and better for shareholders than being un-necessarily diluted. The interest coverage will be good - interest rates are historically low.

The little matter of the purchase price. The purchase price p/e of 26 is based on operating profit after exceptionals not before as you state. Taking account of the synergy savings the p/e drops to 12.23 after three years ignoring any revenue growth. This contrasts with a current basic p/e for Gyrus of 58! A bargain you should therefore think, and immediately value adding if the ratio is maintained.

You've already had my projected forecasts.

Risk increased? Surely yes to some degree. Rationalising and integrating takeovers is always a challenge. But, it is matched by far better prospects. Gyrus will achieve faster growth and magnify returns to shareholders. The currency risk is exaggerated - the purchase is being financed in dollars in cash terms.

I would value your further thoughts.

Regards, Maddox

[optimum] 21/6/2005 00:59

Pachiammos - interesting posting, lots of good points.

However, you do not mention all the cash they are generating, They paid off £10m of debt last year to leave the old Gyrus nearly debt free.
This cash generation will now go repay the debt they have taken on with this expansion.

The new group is also eligible to join FTSE350 - so all the trackers will start looking at the share with more seriousness. This should support the share price further.

I can also see a big increase in profits with the dollar strengthening and the change to accounting practices. Great thing about the company is that their products are single use so it is easy to sell yet another surgical instrument for the next patients' operation.
Look at the growth in generator installations over the last few years - each generator drives additional cash. There is real momentum in their growth.

I think this expansion is really positive and I think we need to give the management a year to get it all bedded in and I think we will see a gear shift in earnings growth.

Question is - will the other major international players buy it first?
My bet is the company is half lining itself up to be taken over.
It is now 2nd largest UK listed medical devide manufacturer. Got to be a good catch for a really big player or a private equity group looking to broker a deal.

I believe it is the likes of J&J, Tyco and Baxter in the US which will be after Gyrus.

As the slowdown in the economy continues there will be a search for cash generative businesses - Gyrus fits the bill.
For the record my estimate is £3.30 by end of year.

All IMHO

[wjccghcc] 20/6/2005 10:01

Good post. Something to think about.

[pachiaammos] 20/6/2005 09:49

I remember being puzzled when the 2004 figures came out that with such good profits there was still no dividend. Now we know why!

The company is optimistic that the ACMI acquisition will give "synergies", and the Times article explains in simple language how.

I'm sure it'll look wonderful on the top line.

The company's profit targets are set out on page 11 of the EGM notice. They really want to get 40%pa average EPS growth over 3 years (2004 to 2007) ie the target EPS for 2007 is 31.52p.

It's marvellous what accountants can do with figures and I wouldn't be surprised if they deliver. The key question is HOW? The keyword is "pre-exceptional" EPS. With the impeccable precedent of Royal Bank of Scotland in mind, what is the likelihood that they will count all the benefits of integration as pre-exceptional and most of the costs as "exceptional items"? And if so, what is the likelihood that, like RBS, the reported profits will double over 3 to 4 years while the share price stays flat?

There is also scope for manipulating the border – shoving costs from 2007 into 2008 and vice-versa with benefits.

I also wonder what management costs they will run into by stepping up from a 600ish people company to a 1500+ people company. 600 people is the size of a sensible secondary school where all the staff somewhat-know all the pupils. 1500 people is an intrinsically much more impersonal unit. Maybe someone here knows more about this than I do? My thought would be that in a company of 600 people, lines of communication are short. There will be project teams and strategic management. Period. Most business decisions can be taken by two people. It's relatively easy for people to feel part of a whole and row all their oars together. Whereas, isn't 1500 a size at which intermediary staff are needed, middle management multiply and senior people spend most of their time in meetings? And maybe it is also much easier for individuals to have interests that conflict with those of the company as a whole?

The other questionmark I see hanging over this deal is the huge level of debt Gyrus is taking on. The striking figures in the ACMI accounts are: net interest payable in 2004 (p & l) $19.78m (nearly 23% of gross profit!); creditors due in more than one year $135.37m; net assets, excluding pension assets and intangibles, minus $91.97m. Compare and contrast the old Gyrus: £0.82m (1.6% of gross profit); £0.1m; and +£32.35m. Isn't it interesting, therefore, that the "financial summary" of ACMI (page 20 of the EGM document) focuses on EBITDA! It doesn't even mention pre (or post) tax profits, not even adjusted profits.

There is also the little matter of the purchase price, 26.7 times operating profit before exceptionals.

On a pro forma basis, 2004 pre-tax profits of Gyrus and ACMI combined, including interest (very real money that has to be spent) and depreciation (a true cost over time too) but not including goodwill (unreal money) and exceptionals (let's be generous and assume they really are exceptional) was £9.60m (comprising £10.23m for Gyrus and minus $1.14m for ACMI). Divide that between the 145.38m shares that there will now be, and that is 6.60p per share. Compared with a share price of 289.5p over the weekend. 289.5p / 6.6p = 43.9

My conclusion: if market conditions and the dollar are favourable, this will be a winner, perhaps especially for those who sell out during 2007. But the RISKS are much bigger than they were with the old Gyrus. With the old Gyrus, the risk was simply that the shares were on a demanding rating requiring the management to deliver high profits growth. This is even more true now at the much higher p/e (historic)-- and in addition, if the market turns sour, or even doesn't grow as expected, where will the means to pay the debt come from?

[money multipier] 18/6/2005 21:26

The Times veiw yesterday

Gyrus

WHEN a management team unveils ambitious plans to double the size of the company on the back of a single acquisition, it is often time to head for the exit. Not so with Gyrus, the medical devices firm that specialises in making equipment for keyhole surgery. Since the turn of the millennium, the little-known company has doubled in size on three occasions, each time by exquisitely executed transactions.

Gyrus's £275 million purchase of American Cytoscope Makers Inc (ACMI) looks a near perfect fit. The US firm will provide state-of-the-art visual hardware to help surgeons to see what they are doing inside the body while Gyrus will provide the tools needed by sugeons to make the repairs.

Gyrus is funding the purchase partly through the issue of new equity and partly by taking on additional debt. Both moves will mean that the company will have to work that little bit harder to make ends meet. But the enlarged business, which will become London's second-largest medical devices firm after Smith & Nephew, will have a powerful franchise in urology and gynaecology. Each market could be worth up to $500 million to the company.

More importantly, however, Gyrus will have a solid US platform from which to launch a new drive into general surgery. Since the US is the world's largest market for surgical products, it is only sensible that Gyrus explores this avenue for growth.

Gyrus is paying a racy price for its paramour: the consideration is equivalent to 18.4 times last year's operating profit minus interest, tax, depreciation and amortisation charges. But the two companies have been courting for more than five years and by paying a full price Gyrus was able to dissuade ACMI's venture capital owners from opting for a trade auction.

Moreover, Gyrus believes that it can strip out between 5 and 10 per cent of the operating costs at the merged business by 2008 before booking a single dollar in sales from the combined business. Brian Steer, executive chairman, believes the merged business can deliver double-digit growth. He is a man to be taken at his word. Buy.

[maddox] 17/6/2005 21:35

Simon,

How about
...............2005.......2006
Fwd P/e........17.5.........10
eps............17p..........47p

Couple of observations. The acquisition is financed 48% by debt, introducing debt which is relatively cheap (not that Gyrus' equity is costing them much at the moment!) will push up the eps and consequently the share price. It also reduces the free float, whilst at the same time as offering a well discounted share placing, is a good tactic. It reduces supply and heightens demand.

Regards, Maddox

[maddox] 16/6/2005 20:58

Simon,

Now that's a tall order. IFRS is going to have an impact and a merger to boot!

I'll have to see if I can make sense of the figures.

Regards, David

[money multipier] 16/6/2005 16:48

Cheers Maddox - guess so far the market agree with you - will be interesting to see if the brokers raise the target price and see if the price can follow.

[simon gordon] 16/6/2005 15:19

I am now drawn to GYG as a move into the FTSE250 and bigger scale should see a re-rating.

I have followed GYG for years but was always put off by the small scale.

Anyone figured out 2006 EPS and P/E?

Good fortune!

[maddox] 16/6/2005 13:02

MM,

First thoughts. Looks like an extremely good business fit. There will be lots of synergistic benefits, sales force rationalisation, cross-selling and pushes forward the international expansion. The previous small foreign acquisitions would not have the same impact as this should have. A classic strategic move.

The key points are that the underlying trading is on-track and Gyrus' management team have pulled-off and successfully integrated 'proportionately' similar acquisitions in the US before - previously doubling their size.

A truly excellent company.

Regards, Maddox

[money multipier] 16/6/2005 12:04

Share price has reacted well - what's your take on the acquisition Maddox?

[maddox] 14/6/2005 21:38

Optimum,

Apologies, thought I'd try a bit of Kerdiff dialect on you. The disposables are made in their US factory, the US is their main market by far.

When this share rises it'll be because of the underlying performance - it has as you can see by this thread a small but convinced band of investors. The share price is in an upward trend at the moment as the underlying growth rate is becoming apparent. Also, the negative dollar effect is starting to unwind. One technical situation on the horizon is that the new IFRS accounting regulations will require Gyrus to report considerably higher profits. Add-in a maiden dividend - that with the cash being generated - cannot be too far away.

So all in all its looking pretty favourable.

Regards Maddox

[optimum] 14/6/2005 18:33

Alright but what? - do not understand what you mean.

I am from Birmingham but had some recent work in Cardiff nearby to Gyrus so used the opportunity to check them out.
So where are the disposables all made? I thought that was in Cardiff.

Sounds like you know what goes on there.

Lets hope the shares move up and it is because of the underlying company strength rather than share tips.

[maddox] 13/6/2005 13:32

Hi Optimum,

Alright butt, I'm from Cardiff myself. Its always good to read a bit of skuttlebut research. Its the generators that are produced in the Cardiff plant rather than the disposables. So its production is supporting further penetration of the market that will lead to accelerating turnover on the disposables front. It is thus a good leading indicator of future sales.

Regards, Maddox

[optimum] 12/6/2005 19:45

I just think they are doing really well - lots of sales, and launching new products.

Also the dollar is due to strengthen with Greenspans plan to increase US interest rates. Since most of Gyrus income is in US$ then this should boost their income.

I drove past their production plant down in Cardiff, looks busy enough.
I worked down the road from them a few times over the last few months so had a look at their car park - always full of cars in the early morning and late at night!

[money multipier] 10/6/2005 21:26

Has this been tipped this afternoon or what?

[maddox] 07/4/2005 16:36

A further move up 12.5p to 273.5p so far today on good volume. This is looking like a very solid trend hitting a series of higher highs and higher lows.

[maddox] 01/4/2005 11:52

Wynmck,
The market has responded well hitting new 12mth highs in a strong upward trend supported by good volume. I think we may have a re-rating underway.

[wynmck] 31/3/2005 15:42

and from todays Shares re recent results....."pre tax profits more than doubled with sales climbing11%........if company had not been hit by the negative change in the dollar value it says sales would have been up 22%........Gyrus set for three product launches this month with more planned for later in the year........"
Shares says:With a growing product base and increasing sales Gyrus looks set for a bumper 2005.
POSITIVE rating given

[wynmck] 24/3/2005 13:14

Article in todays Shares;.."Gyrus launching three new products this month,with one expected to bring in revenues of $30million a year......etc.....Gyrus has recently posted a bumper set of results but with forecasts for 2005 looking good analysts are expecting the shares to keep rising.....Investec recs as Buy:tgt 280 while Panmure Gordon are even more optimistic with tgt price of 351p,both well above curremt 252p level.
Shares says "New products are set to boost Gyrus's already solid profits and shares are poised to continue rising this year.

[maddox] 21/3/2005 20:15

Welcome aboard Artful. A few Broker upgrades to get the ball rolling....

17.03.05 :+4.5, (252) an article in the Times reports: the shares rose 18.5p to 247.5p as forecast beating H2 results prompted analysts to lift their earnings estimates. Investec Securities moved from hold to buy with a 280p target and said that it expects to raise its pre-tax profit forecast by 10 per cent. Numis Securities, house broker, upped its target from 260p to 280p, citing Gyrus’s discount to the healthcare sector.