Broker snap: Creditable first half for Corin

Piper Jaffray, the house broker of hip and knee replacement developer Corin Group says the company is delivering on its pledge to reinvigorate the product portfolio and reckons the stock's 20% discount to the orthopædic peer group is unjustified.

The broker is sticking with its "overweight" recommendation after the group announced constant currency revenue growth that was ahead of its expectations at 6%, though reported earnings before interest and tax (EBIT) at £0.9m was below its £1.1m forecast, though this was largely due to "a change in accounting policy, to expense the Cormet post approval study, [which] increased costs by £0.15m, bringing EBIT close to our estimates on a like for like basis."

The broker is expecting improved profitability in the second half based on a ramp up of sales and only a moderate increase in expenses. Australia is driving growth, the broker notes, with "other territories steady at best."

Piper Jaffray has a price target of 68p for the stock. Risks to the achievement of this target price include the uptake of the Cormet product line in the US, the company's distribution agreements with US medical device giant Stryker, and implementation of the targets identified in the strategic review.

Brewin Dolphin is another broker advising its clients to add the shares to their portfolio. It has a target price of 67p.

"Results were largely as expected with the group reporting 9% top line growth (6% constant currency), which is a creditable performance in the face of relatively tough orthopædic markets, especially in hip resurfacing. The LARS [ligament system] product continues to sell well in Australia, which is now the group's largest market. German sales were weak and are expected to remain so until the launch of the new Knee system in 2012," Brewin Dolphin notes.

The broker does not expect to make any changes to full year forecasts other than to factor in an additional £0.3m research and development expense that was previously capitalised "and a stubbornly high tax charge".

"Whilst the shares look relatively expensive on a P/E [price/earnings]basis, on an EV [enterprise value]/Sales multiple of 0.6x and Price-to-Book of less than 1.0x the recovery potential is apparent, provided new product launches justify the investment and group EBIT margins rise significantly from the current mid-single digit levels," Brewin Dolphin said.


Singer Capital Markets, however, thinks the shares are fairly valued. "The results today do not change our view on Corin - while there continues to be concerns regarding metal-on-metal (MoM) and while Corin's new knee portfolio has yet to be trialled, we believe investors can wait to make a decision on the business," the broker said.

"Corin continues to pursue a me-too strategy of launching a decent range of standard implants - a tough strategy as differentiation to the majors comes down to the sales team and service. The innovative new knee, meanwhile, is still some time away and we would be reluctant to assign value to this until we can see how innovative it is," Singer said.

The broker has a target price for Corin of 61p.