AHZ Reflections from Nov 2017

Well it certainly has been an exciting time to be an Admedus shareholder recently and yet I think we are only warming up.

I was just thinking about Admedus today as I often do and it occurred to me that with the increased volume lately we probably have a lot of new shareholders on board. Many of these shareholders (unlike buyers over the last 3-4 years ) will be pleasantly in profit.

I encourage all new shareholders to contribute to HC and share why you personally decided to buy into this loss making company that is currently “burning cash” called Admedus and what excites you about the future prospects that made it a considered investment for you right now?
  
Last Nov 17 was a dark time for our share price hitting a ridiculous low of just 20 cents. I was just reflecting on what has changed the sentiment since then and what do we still have to look forward to.
  
With the risk of being called the little boy that cries Wolf I would like to say that I genuinely feel that there has never been a better time to buy shares in AHZ than right now. Yes 20.5 cents was a good buy in hindsight but it required a leap of faith at the time - why?
  
* Adapt sales were flat

* India was not approved

*3D was not launched in the US or Canada

* We did not know what it cost to produce C3D and hence what the GM’s were.

*We did not have 16 curved or shaped products in a $500 million pipeline.

*TAVR was still a maybe as the cycle testing had not passed the basic amount of heartbeats to proceed to the next step.

*We had not won any IDN’s or GPO’s

*We has not won other Infusion contracts that we knew about.

* 4C Medical had not started trials

* We did not have an established new head of Europe comfortable in turning things around.

* We were not on the verge of TAVR patents being registered.

*We did not know the world renowned MD’s on our TAVR Advisory board.

* We did not know that we would be putting our TAVR device into sheep and cows so soon and Pre a commercialisation deal adding huge value to the negations.

* We did not know about V3D

*We did not know about our own CHD Advisory board.

*We did not know about discussions to divest some of our holdings in AI and secure future funding.

* We did not know that we were starting to build our own IP in Infusion engineering - increasing future sale value.

*We did not know that In just the first quarter of the year we would have a revenue target upgrade.

* We did not know that Wayne would be doing a roadshow and educating new potential investors like he did at the FNN event.

* We did not know that the first QRT 2018 result was going to be good and “prove” to the investing community that we are on track to hit our stated 2018 targets.

What we DID KNOW for sure was we were:

* Forecast to be CF+ in 4th QRT 2018

* Forecast to make our maiden profit in 2019

* And forecast to achieve 20 million ebit in 2020

But at 20.5 cents what we knew was simply not enough for those selling at the time.

So while on face value it seems that 20.5 was a great buy it was a leap of faith to a certain extent. However, buying at 30 cents more recently with all the “known” knowns somehow made eminently more sense. This is why I genuinely feel that there has never been a better time to buy Admedus than now. (Only IMO and of course I have been wrong plenty of times - DYOR and Not advice etc)

However, again casting my thoughts back to the new shareholders who have joined us in the last 4 months I thought I would share my reflections from the AGM below.

Two reasons: One is that it shows we still have so much to look forward to and two it shows just how much we have achieved since NOV 2017.

This also pleasantly includes a share price that has risen up more than 50% from its nadir.

Very exciting times ahead.

So here it is for its encore (if you have read it before please feel free to save 5 minutes of your precious time and stop reading now!)

My general thoughts from the Admedus AGM Nov 2017:

I flew up from Sydney for the AHZ AGM and spent the day with some great posters (and nice guys) from HC. I also enjoyed some quality time with all of the board, WP, DSD, Danny Zanardo and Ben Jensen.

As everyone on this forum is aware I have been very positive on Admedus for almost three years since I bought my first shares at around 90 cents. For the record I have been buying a lot of shares under 30 cents and luckily picked up some more at 20.5 cents recently. It’s not easy averaging down but when you can see the fundamentals improving significantly while the share price is steadily declining that’s actually when the stock is less risky, not more risky.

So I have been putting my money where my mouth is. I left the AGM as confident as ever that the Admedus turnaround is real and very much on track. As a long term value investor I personally do not tend to worry about the SP action only the business fundamentals.

I often hear investors say they will have time to get in etc and that’s fine, we all have our strategies. However, one of the interesting comments I heard at the AGM is that one morning in the not so distant future we will wake up to an announcement regarding TAVR and everything will have changed. That will be some day (whenever that is) but I won’t be buying after the share price doubles or more on such an announcement. So while I see a significant mis pricing I will take advantage of it.

Most of you will have watched the AGM by now so some simple bullet points and my views will suffice as you will of seen and heard pretty much the same as me.

• Danny was very enthusiastic about emerging markets. He has money in Admedus and is very keen to see it rerate. Egypt, while price sensitive, is a great opportunity. They have a high incidence of CHD etc due to abortion being illegal and some distant family marriages etc. A lot of work has been done with KOL’s and we will attack the private market first and then work our way into the public system. Price is an issue there due to cheap sub standard competitor patches in play. It can be tough convincing the bean counters of how it it is economically savvy to use a higher quality and cost patch like Admedus’s. However, once we get a hold in the private centres we will be able to take share in the public hospitals.

• Danny is keen on India and says a lot of the ground work has been done and the distributor is excellent. He is very upbeat about India in the medium term.

• Danny is super keen on China where quality is more desired than price and Australian products are desired and valued. It’s a time thing (patience) with China but it will be huge when we finally enter that market.

• The fact that we can produce curved patches places us in a different league. While non calcification is very important our moat and competitive advantage will come from being able to make unique curved patches. There are a few projects on the go.

• Seeing the TAVR in the flesh was amazing. This is the real deal and will be desired by a large company looking for a slice of this lucrative market.

• As we have progressed the project so far and own the IP we will be able to attract a better deal with a larger up front payment. That video was amazing!

• Once 4C implants up to 10 people with its TMVR device there is a precedent to suggest they may become a takeover target. If bought by a large company this would be excellent for us as sales would be driven harder and more tissue would be needed.

• The forecast growth in sales for FY 18 (now also CY 18) is for 58%. That puts us on a forward price to sales ratio of less than 2. It is note worthy that Infusions will only grow 10% so the lion share of growth will be from the high margin Adapt business.

• We are on target for 20 million ebitda by 2020 and on a basic per of 20 to 25 that will give us approximately a MC of 400 million and a share price close to $2. I suspect it will be more. A combination of sales in India, Egypt, 3D sales, a recovery in Europe (with all products approved), TGA approval and IDN’s contracts will drive this. I expect the increase in consumable sales in Infusions and high value 3D sales to drive higher margins and improve GP % further. IDN sales may offset this slightly as with volume will come a lower sales price. However, we are determined to maintain our high price point where we can because of the quality of our products.

• Matthew Ratty has been working on building some institutional investor interest and once we are on the verge of being CF+ we can expect some increased investment from institutions.

• The Immunotherapies deal is apparently imminent (although nothing is guaranteed). While I don’t know the details my personal view is that it will involve a modest upfront payment and a retention of a small equity stake so that we retain some future upside. We will no longer have any development costs. I suspect this deal may be done by Christmas but I have learned with medical stocks (and especially AHZ) that things can take longer than you expect.

• We have had some underperforming reps and these have been moved on. The CRM system has helped to identify productivity issues. So while this is disappointing it is normal in business and it is much better that we let underperformers go and re hire than let them stay. It will take time to get the team the best it can be but staff in any small business is always a work in progress.

• Germany is the key to Europe and our two new experienced reps there are making progress.

• A 3D vascular product is on the drawing board and being evaluated. Importantly the feedback and idea for this product was provided by KOL’s as no one else has been able to provide a solution. Essentially we are increasingly providing unmet needs. This will become our moat over time.

• We are developing our own products so that we are not just a distribution business. (I take this to mean that we are developing something of our own in Infusions.)

• Our board are outstanding! Simon came on board AHZ because our science was so compelling and he loves a turn around. We seriously have high achievers who want to be successful and will make the most of Admedus’s potential. Matthew Ratty was very impresssive and I for one am very happy he is on the board working hard for our interests.

• I believe once the Immunotherapies deal is done WP (and other board members) will buy shares on market.

So they are my main observations from the AGM and company in general. In summary I am excited about:

• High margin 3D sales and future products.
• India sales to commence soon.
• Full approval of products in Europe
• An immunotherapy deal
• TAVR is the real deal and will be sought after. A deal will double the share price over night (IMO). I think a deal will be done within 6 to 12 months.
• TMVR could be big and has genuine potential if FDA approval is achieved. Simon knows a lot about TMVR and thinks their solution is A grade.
• IDN’s take a long time to crack but once cracked will make a serious difference.
• Long term - CHINA has huge potential.

All of this potential (and forward revenue of 33 million for FY 18) can be purchased for a MC of just 60 million and CF+ in just 12 months time.

DYOR - Not advice.

Exciting times ahead.