Broker snap: House broker trims Deltex sales forecast

23rd Sep 2010 13:29

Shares in oesophageal doppler monitoring equipment group Deltex Mecial have shot up this week following interim results on Tuesday that showed accelerating sales growth, but the company's house broker thinks Deltex might have left itself too much to do to meet the broker's full year sales forecast.The second half of the year is normally "the seasonally stronger period for the company and the company has a strong pipeline of potential business, including some significant individual projects," according to Arden Partners. However, the stockbroker's current full-year sales forecast of £6.8m implies 27% growth in the second half, "which we think is achievable albeit somewhat demanding, particularly given the trend towards placing rather than selling monitors," Arden analyst Chris Thomas said. The broker has therefore trimmed its forecast sales from £6.8m to £6.5m, representing 17.4% growth in the second half, which would still allow the company to break even in the second half as well as generate cash before working capital movements."Looking further out, we believe that the company should be able to return to, or even exceed, historic growth rates of c25%. We have assumed 25% sales growth in 2011 and 2012 and given the high gross margin of c77% this should lead to a rapid improvement in the financial position of the group," Thomas opines. "Our model assumes that, once the group moves into profit, roughly half of incremental gross profits will be reinvested in the business in additional sales and marketing resources and R&D [research & development] to drive further growth but ... this would still allow rapid improvements in profitability and cash generation," the broker said.