SomnoMed: Interim result 2014

Last month we introduced mandibular splint manufacturer SomnoMed (try saying that three times quickly) to our buy list in SomnoMed: A future mini-ResMed on 5 Feb 14 (Speculative Buy – $1.33).

Mandibular splits look like a oversized mouthguard and prop the lower jaw forward slightly, to keep the airway open and prevent people suffering from obstructive sleep apnea (OSA) while they sleep.

'CPAP' masks made by ResMed and its ilk are the better known treatment option, but for those with mild to moderate OSA that hate sleeping (or even can't sleep) with something over their face, mandibular splits make a sound alternative (even ResMed says so).

Now SomnoMed isn't going to be battling it out with ResMed any time soon, but with revenue of only $18.5m in the last financial year, it can get a lot bigger before the gorilla pays it much attention. And it's certainly been doing that, with revenue and gross profit more than doubling over the past four years.

The recent half-year result showed further progress. Units sold rose 19% to 20,455, and management confirmed its expectation for 43,000 units to be sold in the full year, to provide revenue of $23m–25m.

Revenue in Europe soared by 60% (on unit sales growth of 47%) and was higher than the US for the first time in the company’s history.

So it’s curious that management still described the US as ‘the company’s largest market’ in its commentary, though it noted that it 'continues to offer SomnoMed further growth opportunities and strategic alliances that should be reflected in more positive results in the second half’. Perhaps the US will reclaim the revenue crown for the full year.

SomnoMed on track

The gross profit also showed healthy growth, from $6.0m to $8.1m, although net profit fell 73% to $0.1m. We're not too concerned about the bottom line at this stage though and before various investments and one-off costs, the company pointed to a 13% rise in 'underlying earnings before interest, tax, depreciation and amortisation' to $1.7m.

In short, the SomnoMed story remains on track. Yet the calculus has changed from an investment perspective, with the price up 27% since our recommendation on 4 Feb 14 (Speculative Buy – $1.33).

Today’s price is above the $1.60 recommendation guide we set in our research. But situations like this are something of a grey area.

If the broad growth story remains on track over the coming years, then it won’t matter whether you paid $1.60 or $1.80. Yet at some point you have to draw a line, which is what we’re doing today.

If you personally have particular confidence in SomnoMed, then you may be more comfortable paying up for the stock, but we’re taking the more conservative route and changing our recommendation to HOLD.