LMA – Small Cap Stock, Large Global Market Share

In Singapore, there are only a handful of companies in the healthcare sector, much less in the medical instruments. In this handful of companies, there is one company whose market capitalisation only amounted to $215.4 million but it has a 75 percent global market share in the products which it sells. Most investors may not have heard it before. This company is called LMA International N.V.
Background Of LMA
LMA designs, manufactures, markets and distributes LMA™ laryngeal mask airway range of supraglottic airway devices and LMA Atomization™ devices for pain-free administration of medication. An approximate 25 percent of the world’s operations under general anesthetic employ LMA’s products. The nearest competitor is Ambu which has about 10 percent global market share and is listed on the NASDAQ OMX Copenhagen. (Ambu trades at a historical PE of 23.6x vis-à-vis LMA’s 9.1x.) I am intrigued by LMA especially with its dominant global market share and met up with LMA’s chief executive officer, William Crothers, where he candidly shared with me LMA’s business developments and future prospects in an exclusive interview.
Ernest: Under your FY11 revenue segmentation by products, 98 percent of total revenue was booked under “anesthesia products” and the balance recorded under “other products”. What do other products refer to?
William: Products such as laryngeal masks, LMA atomization products are our core products as they pertain to airway management, thus they are classified under “anesthesia products”. Products such as orthopedic and ear-nose-throat (“ENT”) do not pertain to airway management would be classified as “other products”. Other products are actually our means of testing out new products and typically make up a small percentage of our total revenue.
Ernest: With reference to your prospectus, you had a global market share of 85 percent. In your recent results release, your market share seemed to have declined to 75 percent. Although it is still an impressive figure, can you share with me the reasons why your global market share had dropped?
William: In 2005, we did estimate that we have about 85 percent global market share. Since then, more competitors have entered the market. Despite our market share having fallen to 75 percent, we would like to point out three key points. Firstly, the entire total anesthetic operations industry is growing at a rate of 2 percent to 3 percent per annum. This means that we are selling more products even if our market share declines marginally. Secondly, statistics outside US are estimates and fluctuate from year to year. Thirdly, despite the attempted entry of more competitors, we still dominate the market with 75 percent market share. Ambu which is our nearest competitor only has 10 percent global market share with the balance 15 percent shared by other competitors.
Ernest: Although your sales have been rising since 2006 and reached a record US$124 million in 2011, net profit excluding net litigation settlement and non-cash charge has dropped from the high of US$24 million in 2006 to US$16 million in 2011. Net margins declined from 27 percent to 13 percent. What are the reasons for this sharp decline?
William: Besides the entry of new entrants, there is a gradual shift from reusable products to single use products. Reusable products typically command higher gross margins (GM) of more than 80 percent vis-à-vis single use products (GM: over 60 percent). Although single use products carry lower margins, they offer a more predictable income stream and the sales quantum are larger.
Ernest: With regard to your Malaysia factory in Kulim, how is the progress? I understand that Kulim can reduce manufacturing costs as much as 30 percent. Can it contribute to your results in the near term?
William: Our in house manufacturing plant in Kulim commenced production of LMA SupremeTM in 1Q12 and is ramping up production over 2012. By 4Q12, we will have reached maximum capacity for Stage 1 of our plans.
Ernest: What are the three biggest challenges that LMA faces?
William: Firstly, LMA faces competition from competitors. We are nonetheless cognizant of this and strive to develop more advanced and patented products. For example, our LMA SupremeTM, is the only 2nd generation SAD available in the world and despite the premium price over other airways, demand for LMA SupremeTM is growing at over 30 percent per annum. We are also looking to develop our 3rd generation SAD in the foreseeable future to extend our competitive lead over the other competitors.
Our second challenge is movements in the exchange rate. Our sales are predominantly denominated in US dollars but our operating expenses came from a multitude of currencies, thus, large movements in the exchange rates may have a material impact on our results.
Thirdly, the constant challenge that we face is that we have to convince our customers such as doctors to convert from endotracheal tube to supraglottic airway and from reusable products to single use products. This conversion occurs gradually as people are resistant to changes.
Ernest: Lastly, to sum up, what are LMA’s three biggest investment merits to our readers?
William: Firstly, LMA has a significant dominant market share in the laryngeal mask products and our nearest competitor has only 10 percent. Most players in this industry know LMA and are comfortable to do business with LMA as our brand signifies quality and safety.
Secondly, LMA is the only company in the world with 2nd generation SAD product, LMA SupremeTM that offers anesthetists improved technology and greater security against aspiration. This is likely to be a key growth driver for us.
Thirdly, LMA is shareholder friendly. LMA bought back about 6.2 million shares between $0.30 to $0.355 in 2011. It also distributed 1.5 Singapore cents dividend per share for 2011, translating to a dividend yield of 3.7 percent. Going forward, we remain committed to paying out dividends.
If William’s enthusiasm is anything to go about, it is likely that LMA’s shareholders may have something to look forward to in the next couple of years.

* The article was earlier published on sharesinv.com and the Shares Investment magazine.

Disclaimer
The information contained herein is the writer’s personal opinion and is provided to you for information only and is not intended to or nor will it create/induce the creation of any binding legal relations. The information or opinions provided herein do not constitute an investment advice, an offer or solicitation to subscribe for, purchase or sell the investment product(s) mentioned herein. It does not have any regard to your specific investment objectives, financial situation and any of your particular needs. Accordingly, no warranty whatsoever is given and no liability whatsoever is accepted for any loss arising whether directly or indirectly as a result of this information. Investments are subject to investment risks including possible loss of the principal amount invested. The value of the product and the income from them may fall as well as rise. You may wish to seek advice from an independent financial adviser before making a commitment to purchase or invest in the investment product(s) mentioned herein. In the event that you choose not to do so, you should consider whether the investment product(s) mentioned herein are suitable for you. The writer will not, in any event, be liable to you for any direct/indirect or any other damages of any kind arising from or in connection with your reliance on any information in and/or materials appended herein. The information and/or materials are provided “as is” without warranty of any kind, either express or implied.  In particular, no warranty regarding accuracy or fitness for a purpose is given in connection with such information and materials.

Leave a Reply

Your email address will not be published. Required fields are marked *