Life Healthcare Group (LHC) is an independent medical device distributor. Their business is focussed on nine key channels:
- Surgical instruments
- Capital equipment
- Biologics, and
Life Healthcare has been on our investment radar since listing 12 months ago for numerous reasons. These include:
- Long term growth industry as both technology and an ageing population increase the demand for medical intervention
- Core exposure to spinal devices for which the growth in demand is more than double that of hip or knee procedures
- Capability to leverage new devices and services in to their existing channel.
Despite some great investment metrics we haven’t ever invested in LHC – to our detriment it would appear. At the core of this LHC has only been listed for 18 months and had no track history. Given all of their products were imported we were concerned with how they would cope with a falling $A (which increases the cost of goods sold). At listing LHC hedged all their $A exposure for 12 months. They did this at $0.97. A great win given the subsequent fall in the $A but our concern is what happened when the hedges rolled over and could they effectively pass on the price rises.
As the history of their management gathers they’ve proven quiet adept at managing this fall. As their hedge positions roll off they’ve implemented new ones. Their strategy of a rolling 12 month hedge allows them to prepare & pass on the cost increases associated with $A fluctuations. Further it seems they have strong relationships with their customers who they’ve educated on the effects of the foreign exchange position who are happy to accept price increases over time.
Still, like all businesses, other risks remain. These include:
- They sell medical products & devices. These are only as good as the next new product which replaces them. If someone else can develop a better product LHC will lose sales;
- Growth is determined by their ability to deliver new products into their existing clients or by creating new clients; and
- Gearing levels are high at 65%. Changes in interest rates will impact profitability for the next few years.
In all, LHC looks an interesting little company but it should be noted, there isn’t a lot of shares traded every day (on average about $200,000 per day change hands). This is great for periods of good news – as was the case this week with a well-priced acquisition – as a lot of investors trying to get in quickly will rapidly push the price higher. If the news is bad however, there will be few buyers in the market and the price will fall significantly as investors jump over the top of each other to get out.
Liquidity in a share can be important and is something we include in our assessment of whether we will invest in a company. Put simply, if we are invested we want the ability to be able to get out, quick without a massive hit (if possible). For LHC so far, so good but investors should beware of the risks any bad news pose on its thinly traded shares.
If you want to know more about LHC talk to your adviser.
This is for general information purposes only and should not be taken as personal advice or a recommendation to purchase shares in LHC. Please consult your adviser to ensure this investment is the right investment for you.