Monday, January 10, 2011

Axis Shield Trading Statement









Axis Shield gave a trading update today which can be found here. It was met with somewhat of a relief rally in the stock price. I’m in two minds about this being a stock to buy. Frankly, I think it is good value longer term but it is susceptible to short term earnings driven weakness and, I normally shy away from such situations.

If you send me your email address marked ‘Axis Shield’ I will reply with a pdf of a research report I have on the company.

Axis Shield is an interesting stock because it has a whole host of drivers or themes to its prospects. Whilst the main growth driver will be the Point Of Care division and, in particular Afinion, the bulk of ASD profits are generated by their Laboratory Division and that appears to be under pressure.  I’ll come back to that point but first I want to look at the three divisions in the context of this trading statement.


Point of Care Holds Axis Shield Growth Catalysts

Firstly, looking at Point of Care the earnings catalysts are

  • Diabetes growth
  • Emerging markets growth, mainly through Nycocard
  • Growth in point-of-care diagnostics, expanding Afinion sales
  • CRP flu testing (defines if flu is viral or bacteria) seen as vital in order to reduce antibiotic prescriptions
  • New Afinion test approvals

Now, in this latest update they were 600 short of the 3500 new global Afinion instruments they thought they would have in place. For future reference, here are analyst forecasts for future Afinion sales




2009
2010
2011E
2012E
Total Systems
6,700
9,600
12,200
14,700
New Systems
2,700
2,900
2,600
2,500



Afinion sales were disappointing. In March 09 they had bought back distribution rights from Abbott Diagnostics for Afinion and had made optimistic noises. Moreover, even up until their trading statement of Oct 28 they were affirming that they were on track for 10,000 but according to the half year report they only had 7,700 at that stage. Note that this statement saw them subtly adjust the target down from 3,500 new systems.

So, with today’s statement, they are telling us that in two months, they fell 400 short of the 2300 (for the half year) they were ‘on track’ to achieve in the Oct 28 statement.  

I am not satisfied with this level of guidance and this is not the first time!

Earlier this year in the finals given on March 16 they said…

We continue to see exciting opportunities for growth across the business, both organically and through complementary acquisitions, and we look to the future with confidence.  We anticipate further progress in 2010
Then on May 10th they warned on profits

As a result revenues for the 18 weeks to the end of April 2010 are slightly above those for the same period in 2009 (adjusting for the sale of Plasmatec) but are lower than the Board's expectations.  Should these trends continue throughout 2010, this would result in a material shortfall in Company revenues and profitability compared to Board expectations.
Note that March 16 is 12 weeks into the 18 week period when suddenly ‘growth’ becomes a potential ‘material shortfall’. I appreciate that the strength of the flu season is always uncertain and Jan/Feb tends to be the worst months but how could they have not known that it was going to be a benign season by March 16th?


With regards Nycocard they stated results would be slightly lower, but short term prospects will be guided by the 2010/11 flu season.


Laboratory Division

Following this reference in the October statement…

The pipeline of novel tests in the Company's Laboratory Division is developing well although the usual commercialization strategy on the laboratory platforms of Axis-Shield's global partners may be affected by some tightening of their external development expenditure coupled with the ongoing sector consolidation and resultant system rationalization
...there was cause for concern but they reported ‘stable’ revenues. However, I think that this division still presents potential for short term weakness. At the last finals, it represented 104% of segmental operating profits. Any change in demand, or contracts lost due to customer consolidation will cause significant damage to Axis Shield’s profitability.


Direct Distribution

This is an odd division, as it is low growth and low margin but yet serves as a conduit for generating sales for Afinion and Nycocard, in the Nordic regions. They see growth in that respect, but third party sales are predicted at the same level.

Frankly, they haven’t been able to generate margin growth in this division in recent years. Furthermore, it looks like third party distribution could even be a ‘loss leader’ for them, in order to generate sales growth for Afinion and Nycocard.

Given that they bought back distribution rights from Abbott in the US, this would suggest that they feel comfortable in expanding PoC sales (alongside PSS) and, without the need to rely on Abbott to sell Axis Shield’s PoC within Abbott’s distribution.

If so, then this represents a diametrically opposed approach to that which they are taking in the Nordic regions. Moreover, hospital budgets are constrained and pricing pressure is inevitable going forward. I can see them selling this business.


Conclusion

In conclusion, longer term, I think growth prospects are good with PoC and Lab divisions. Short term, they are falling behind targets with Afinion. The Lab division is still under uncertainty and Direct Distribution has question marks against its business model. Moreover, this company is not demonstrating the ability to give accurate guidance.

I like their longer term growth prospects, but will prefer to stay out until these short term threats are resolved. There is upside from a severe flu season and resumption to growth, but I don’t like buying stocks in which the uncertainty is rising not falling.