Genetic Signatures Limited

Company Overview: Genetic Signatures Limited (ASX: GSS) is involved in the commercialisation of its 3base™ proprietary platform technology. 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 currently operates in key markets primarily related to hospital and pathology laboratories undertaking contagious disease screening.

GSS Details

GSS Rides on Decent Quarterly Numbers & Healthy Cash Position: Genetic Signatures Limited (ASX: GSS) is a molecular diagnostics company, which mainly concentrates on the enhancement and commercialisation of its proprietary 3base™ platform technology. The company remains on track to carry out its clinical trial work to obtain US FDA clearance of the EasyScreen^TM Enteric Protozoan Detection Kit. The company remains positive and expects the initial data collection to be completed from the first site and ready for assessment by the end of 3QFY21. During the quarter, the company received approval of CE-IVD registration for the EasyScreen^TM STI / Genital Pathogen Detection Kit, depicting fourth product line to be commercialised in Europe and UK. Given the current scenarios, and uncertain environment, the company look forward to performing a key role as governments urge people all over the globe to continue testing to curb the impact of coronavirus outbreak.  Notably, the global market for STI molecular testing is projected at A$1.9 billion per annum.

The company reported an excellent third quarter of fiscal 2021 results, with revenue growing on a year over year basis along with positive cashflow. Results were positively impacted mainly due to the demand from its customers in the wake of the second wave of COVID-19 pandemic. Quarterly revenue came in at $4.3 million in 3QFY21, skyrocketing 136% year over year. On a year-to-date basis, revenue stood at $23 million for the 9 months ended 31 March, which is more than double from FY20 revenue. It received receipts from customers amounting to $4.6 million during the quarter. There has been continued growth in international sales with a contribution of 43% of the total quarterly revenue. International revenue increased from 24% reported in the previous quarter.

3QFY21 YTD Performance; Analysis by Kalkine Group

Expanding Geographic Reach: The company witnessed strong demand for its SARS-CoV-2 Detection Kit in 3QFY21. SARS-CoV-2 has given the company access to several new customers in the USA, Europe, and Australia. GSS remains well placed to take advantage of the prospect with regulatory approvals for Respiratory, Enteric, STI and antibiotic resistance detection kits in Europe and Australia. The company continues to supply EasyScreen^TM SARS-CoV-2 Detection Kits to its customers in the USA. The company expects these kits sales to accelerate in 4QFY21. Genetic Signatures limited remains on track to make massive progress on its expansion strategy, thereby tapping on the prospects led by the COVID-19 pandemic along with leveraging its internal abilities to deliver record growth. During these uncertainties, which is spread all over the world due to coronavirus outbreak, testing remains an important tool for securely re-starting economies.

The company’s total revenue and gross profit came in at $18.84 million and $12.1 million, respectively, in 1HFY21. This depicts a rise from $3.45 million of revenues and $2.01 million gross profit reported in 1HFY19. The company remains on track to deliver on its growth strategies through a diversified product portfolio and expanding geographic reach. Additionally, the company also increased manufacturing capacity to deliver supplies to its customers across EMEA and APAC. The company also remains on track to strengthen its foothold in the domestic market, driving exceptional revenue growth, which is expected to continue in coming months.

Past Performance; Analysis by Kalkine Group

Key Metrics, Healthy Balance Sheet and Decent Liquidity: At the end of 3QFY21 (as at 31 March 2021), cash balance stood at $31.9 million, with nil debt. Net operating cash outflow in Q3FY21 stood at $3.4 million. At the end of 1HFY21, the company’s cash balance came in at $36.3 million. A healthy balance sheet will help the company to attain its long-term objectives and will aid the company to enhance its shareholder’s value. The company is making efforts to improve its EBITDA margins, operating margins, and net margins. In 1HFY21, the company had a current ratio of 9.16x, higher than the industry median of 3.86x, representing a decent liquidity position.

Profitability and Liquidity Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 62.17% of the total shareholdings, while the top 4 constitutes the maximum holding. Asia Union Investments Pty. Ltd. and Perennial Value Management Ltd. are holding a maximum stake in the company at 26.24% and 14.91%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group  

Risk Analysis: GSS operates in a highly competitive environment, which is subject to ongoing significant changes, including business consolidations, new strategic alliances, market pressures, and regulatory and legislative pressures.  The company is also exposed to risk associated with general global economic and market conditions, particularly those impacting the healthcare industry. Also, higher expenditure and adverse currency translations add to the woes.

What to Expect: Going forward, the company’s growth strategies, expansion of product suite, regulatory approvals and other investments are expected to boost the top-line growth of the business.

Also, the ever-increasing international recognition through the EasyScreen^TM SARS-CoV-2 release determines new opportunities to expand the customer base. Further, the company’s decent liquidity postion is likely to accelerate its commercialisation strategy and will aid the company to scale up for the increased demand from SARS-CoV-2 testing.

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

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: The stock of the company has corrected by ~30.57% in the past six months. Currently, the stock is trading below the average of its 52-week’s high and low level of $2.94 and $1.1, respectively, proffering an opportunity for share accumulation. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). We believe that the company might trade at a slight discount as compared to its peer average, considering its supply chain disruption risk, increased costs and expenditure associated with developing SARS-CoV-2 testing Kit, foreign currency Risk and strict regulatory approval, etc. For that purpose, we have considered peers such as ImpediMed Ltd (ASX: IPD), and SomnoMed Ltd (ASX: SOM), to name a few. Considering the robust 3QFY21 performance, FDA submission for the EasyScreen™ Enteric Protozoan Detection Kit, higher demand from SARS-CoV-2 testing Kit, decent liquidity position, and encouraging long-term outlook, we recommend a “Buy” rating on the stock at the current market price of $1.16, as on 2 June 2021.

GSS Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined:-

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Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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