Genetic Signatures Limited

Company Overview: Genetic Signatures Limited (ASX: GSS) is a molecular diagnostics (MDx) company, which is engaged in the expansion and commercialisation of its proprietary platform technology, 3base™. The company is also involved in designing and manufacturing a suite of real-time Polymerase Chain Reaction (PCR) based products to identify infectious diseases under the EasyScreen™ brand. The company presently operates in key markets mainly related to hospital and pathology laboratories undertaking contagious disease screening.

GSS Details

GSS Rides on Strong Demand for the EasyScreen™ & Geographical Expansion: Genetic Signatures Limited (ASX: GSS) is a molecular diagnostics company, which mainly concentrates on the enhancement and commercialisation of its proprietary 3base™ platform technology. This technology aids the company to lessen the impact of genetic complexity of infection detection in molecular testing.  The company also seeks to become a top leader in the supply of diagnostic solutions for the quick recognition of contagious diseases. In doing so, the company is taking necessary measures to timely, and accurately diagnose patient outcomes, thereby improving the implementation of suitable infection control measures, which reduces costs and protect lives. The company remains on track to drive customer and shareholder value, via minimising work and maximising results, at the same time enhancing community health worldwide.

The year 2020 have marked an exciting year for GSS and it remains on track to curb the impact of COVID-19 led disruption and strengthen its position as a global supplier of molecular diagnostic tests. Notably, for the period ended 30 June 2020, the company recorded total sales revenue of A$11.3 million, depicting an increase of 131% on a year over year basis. The increase in revenues aided the company to record a profit for 2HFY20, an important achievement for the company. The robust performance in FY20 has helped the company to gain investors’ confidence. In FY20, the company reported net loss of $2.09 million. During the period, the company’s total expenditure increased by 35% year over year, primarily due to hiring of additional personnel to the teams in Europe, USA, and locally across all functions. 

Further, the company has been included in the S&P / ASX All Ordinaries Index, backed by rise in its overall market capitalization.  This achievement is expected to strengthen the company’s presence and draw wider array of investors internationally. Expanding sales to customers across APAC and strong demand for the EasyScreen™ has underpinned the company’s strong financial performance. The company raised $37.5 million funds in late 2019, which helped it to come out stronger during the coronavirus led pandemic. These funds also helped the company to commercialise and scale up for the increased demand from SARS-CoV-2 testing Kit to market in key target regions, thus depicting operational flexibility and adaptability of the company’s 3base^TM technology. The company is also taking the necessary steps to bolster its position in North America, which is the largest diagnostics market globally. The company has also taken additional measures to expand its international business and create a key milestone to enhance shareholder’s value in FY21.

Revenues From 2017-2020 (Source: Company Reports)

1QFY21 key Highlights: The company recorded a robust quarterly revenue of $10.5 million in 1QFY21, which increased a whopping 585% from the prior corresponding period and 50% from 4QFY20. The company witnessed strong demand for its SARS-CoV-2 Detection Kit in 1Q FY21, subsequent to the second wave of COVID-19 led outbreak. In doing so, the company took necessary measures to install multiple new instruments in 1Q FY21, which in turn is expected to support future demand for tests. During the quarter, the company recorded a positive cashflow, adding $2.0 million in total and $3.4 million in net cash from operating activities. Throughout the quarter, robust demand from customers in Australia remained on track. In EMEA, sales increased greater than 70% as compared to the previous quarter and represented more than 15% of 1Q FY21 revenue. During the period, the company signed a new distributor in Greece, where tests performed to detect COVID-19 virus increased rapidly since August 2020. Receipts from customers stood at $11.4 million. The company exited the quarter with cash balance of $33.2 million and no debt. The company’s business remains well capitalised to market through this uncertain period. It is worth mentioning that GSS has received a R&D tax refund of A$2,578,627 in 2QFY21.

1QFY21 Key Highlights (Source: Company Reports)

Healthy Balance Sheet and Decent Liquidity: In FY20, the company had a current ratio of 13.84x, higher than the industry median of 2.92x, representing a decent liquidity position. Debt to Equity ratio for the same time span stood at 0.02x, lower than the industry median of 0.06x. Gross margins in FY20 stood at 56.9%, higher than the industry median of 48.5%. The company reported $46.2 million of total current assets, with cash amounting to $31.18 million and trade and other receivables of $5.2 million. Lease liability at the end of FY20 stood at ~$0.74 million. Net cash outflow from operating activities came in at $9.49 million. Through the capital raising program, which the company undertook in 2019, positioned it to strengthen its balance sheet for future growth and remains open to utilise its fund to enhance shareholders' returns.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 60.39% of the total shareholding. Asia Union Investments Pty. Ltd. is the entity holding maximum shares in the company at 26.25%. Perennial Value Management Ltd. is the second-largest shareholder, with a holding of 13.48%.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Risks: The company is exposed to foreign currency risk, interest rate risk, liquidity risk and credit risk. Also, the increased costs and expenditure related to developing SARS-CoV-2 testing Kit using a costly technology and pipeline setbacks are few major headwinds. The company is exposed to shorter-term disruptions hindering from challenging macro-economic environment due to COVID-19 led outbreak. Further, GSS also faces stiff competition from peers, which adds to the woes.

Outlook: GSS is well equipped to accelerate global sales, increase its market share of the fast developing molecular diagnostics market, and achieve additional regulatory approvals to supply EasyScreen™ SARS-CoV-2 Detection Kit to the USA. The company remains on track to develop new products and instrumentation to further drive future growth. The coronavirus led outbreak has aided the company to launch new customers to the full suite of EasyScreen™ multiplex kits, which in turn is likely to aid the company to further accelerate revenue growth and provide shareholders’ value and improve community health across the globe in FY21 and beyond.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The company has a market capitalisation of ~$252.88 million. Currently, the stock is trading below the average of its 52-week’s high and low level of $2.94 and $0.900, respectively, proffering an opportunity for stock accumulation. The stock of the company has corrected ~11.5% in the past one month but went up 59.5% in the last one year. On a technical analysis front, the stock has a support level of ~$1.64 and a resistance level of ~$1.985. From the analysis standpoint, the company has recorded revenue growth at CAGR of ~59% over the last four years. We have valued the stock using EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). For that purpose, we have considered peers such as ImpediMed Ltd (ASX: IPD), Medical Developments International Ltd (ASX: MVP), and SomnoMed Ltd (ASX: SOM), to name a few. Considering decent FY20 and Q1FY21 performance, increased demand for SARS-CoV-2 testing Kit, decent liquidity position, current trading levels, and encouraging long-term view, we recommend a “Buy” rating on the stock at the current market price of $1.77 as on 25 November 2020. 

GSS Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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