Is this the best UK penny stock to buy today?

Ben McPoland thinks this penny stock is nicely positioned for huge international growth over the coming years. Here’s his case for buying.

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The market continues to be extremely volatile as we move into the final quarter of 2022. Rather than focus on stocks that have performed well recently, I’ve been looking for neglected companies and potential hidden gems. And I’ve found one penny stock that I’m now seriously considering buying for my portfolio. Let’s take a closer look.

The business

Creo Medical Group (LSE:CREO) is a medical devices company operating in the emerging field of surgical endoscopy. In layman’s terms, that’s operations carried out via tubes with cameras.

The company’s leading product is called Speedboat, which is a device attached to an endoscope and used to cut out or vaporise pre-cancerous growths in the digestive tract. Endoscopes are normally only used to investigate or diagnose diseases, not treat them.

This means the company’s technology is a bit of a game-changer, both in terms of patient outcomes (less invasive procedures) and cost savings for healthcare systems. In fact, it’s been demonstrated that the Speedboat device saves the NHS between £5,000 and £10,000 per procedure compared with existing methods. Speedboat is now used across the globe.

Creo Medical is built on a razor-and-blades business model, where there’s the one-time sale of the razor (or medical device, in this case), followed by years of recurring revenue from the blades (consumables). This is an attractive business model because it is underpinned by reliable, recurring income from consumables.

The numbers

Despite ongoing disruptions from Covid-19, total sales grew to £25.2m, according to the 2021 annual report. This was up substantially from 2020’s £9.4m figure, though that was also a year marred by the pandemic.

The loss before tax did widen to £30.3m over the same period, which means the company is far from profitable. Management expects this loss to narrow substantially now that it has built out the foundations for growth. Of course, only the company accounts will inform us whether that happens.

Creo Medical currently has £26m in cash. At its current rate of cash burn, it should be good for just under a year or so before needing to raise further money. If and when that happens, the share price could head lower, depending on the financing details. So this is a serious risk I need to consider.

International growth and a massive partnership

The group opened its first US headquarters last year, with its commercial roll-out in the key US market advancing rapidly. It has also opened a regional hub in Singapore to support its move into Asia.

The company has a strategy of build, buy, partner, and it has been making eye-catching progress recently in the partnering side of this strategy. It has signed a multi-year collaboration with Intuitive Surgical, the global leader in robotic-assisted surgery.

Under the agreement, the company’s products are to be made compatible with Intuitive Surgical’s robotic technology. A number of milestone payments to Creo Medical have been agreed, as well as royalties for products sold in the future.

I think the fact a global leader like Intuitive Surgical has chosen to partner with a small company like Creo Medical is a massive endorsement for its products and technology. The company’s current market cap of just £97m seems extremely attractive to me. With shares down 64% so far in 2022, I’d class this penny stock as a hidden gem.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Ben McPoland has positions in Intuitive Surgical. The Motley Fool UK has recommended Intuitive Surgical. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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