Genetic Signatures Limited

Company Overview: Genetic Signatures Limited (ASX: GSS) focuses on the improvement and commercialisation of its proprietary 3base™ platform technology, along with designing and manufacturing of real-time Polymerase Chain Reaction based products to sense transferrable diseases under the EasyScreen™ brand.

GSS Details

GSS Rides on Decent Operational & Financial Fundamentals: GSS has witnessed strong demand for its SARS-CoV-2 Detection Kit, which is expected to support future demand for tests. SARS-CoV-2 has aided the company to gain access to several new customers in the USA, Europe, and Australia.

Key Takeaways from Q3FY21 (March Quarter Update):

• Robust Revenue Growth: In 3QFY21, the company’s revenues increased ~136% year over year and came in at $4.3 million. GSS reported $23 million in revenues for YTD2021 (nine months ending 31 March 2021), depicting more than double revenues on FY20. Results were positively impacted mainly due to the demand from its customers in the wake of the second wave of the COVID-19 pandemic.
• International Expansion: There has been continued growth in international sales (Europe and North America) with a contribution of 43% of the total quarterly revenue. International revenue increased from 24% reported in 2QFY21.
• Decent Customer Receipts: During the quarter, the company received $4.6 million from customers. Whereas, on a YTD2021 basis, total customer receipts amounted to $25.9 million.
• Healthy Balance Sheet: As of 31 March 2021, the company’s cash balance stood at $31.9 million, and no debt
• Approval for Registration: In 3QFY21, GSS received approval of CE-IVD registration for the EasyScreen^TM STI / Genital Pathogen Detection Kit, illustrating the fourth product line to be commercialised in Europe and UK. Notably, the worldwide market for STI molecular testing is projected at A$1.9 billion/year.

The ever-increasing international recognition through the EasyScreen^TM SARS-CoV-2 release determines new opportunities to expand the customer base. The company is taking the necessary steps to bolster its position in North America, which is the largest diagnostics market globally. The below picture depicts GSS’ YTD revenue from international operations.

International Performance; Analysis by Kalkine Group

Geographical Contribution: 

• Expansion in the U.S Market: GSS remains on track to supply EasyScreen^TM SARS-CoV-2 Detection Kits to its customers in the USA. It anticipates these kits sales to accelerate in 4QFY21.
• Rise in Revenues from Asia Pacific Region: In 1HFY21, revenue from the Asia Pacific region increased a whopping ~519% and came in at $15.1 million.
• Increase in Revenues from the EMEA region: The European and UK market remain a key focus area of GSS through 1HFY21 and beyond. EMEA added ~$3 million to revenue in 1HFY21, up from ~$0.1 million reported in the year-ago period.
• Contribution from North region: In 1HFY21, revenues from North America stood at $0.6 million, portraying the 1^st notable sales in the USA.

Key Findings from 1HFY21 Results: 

• The company reported 1HFY21 revenues of ~$18.7 million, depicting a rise of ~638% on a year over year basis.
• During the period, around 19% of the total revenues came from European and US customers, up from 4% recorded in the prior corresponding period.
• The company reported its first significant profits of $4.49 million in 1HFY21, as compared to a loss of $2.34 million reported in the year-ago period. This was on the back of a higher revenue base and improved gross margin (up 67% on pcp).
• The company had raised capital in October 2019, which provided adequate funds to facilitate existing growth. 

Balance Sheet & Liquidity Position: The company’s decent liquidity position is likely to accelerate its commercialisation strategy and will aid the company to scale up for the increased demand from SARS-CoV-2 testing. 

• Increase in Cash Balance: The company exited 1HFY21 with a cash balance amounting to $36.27 million, up from $31.17 million reported at the end of 30 June 2020. The company’s total debt at the end of the period stood at ~$573k. 
• Rise in Cashflow from Operations: Operating cash inflow in 1HFY21 came in at ~$7.79 million, an improvement from cash outflow of $90K reported in 1HFY20. 

 Key Metrics: In 1HFY21, the gross margin of the company stood at 64.2%, higher than the year-ago figure of 57.1%.  EBITDA margin for 1HFY21 stood at 30.5%, as compared to -52.5% in 1HFY20. The debt-to-equity ratio in 1HFY21 came in at 0.01x, lower than the year-ago figure of 0.02x.

Growth and Profitability 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 constitute 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:  

• COVID-19 Led Uncertainties: The company is also exposed to risks associated with general global economic and market conditions, which may cause a delay in shipping products or the launch of new products.
• Stiff Competition: GSS operates in a highly competitive environment, which is subject to business consolidations, new strategic alliances, market pressures, and regulatory and legislative pressures.  
• Forex Headwinds: Any adverse movement in foreign exchange price may impact the financial performance of the company.
• Failure of Clinical Trials: The clinical trial process is designed to assess the safety and efficacy of a medical device before commercialisation and a failure to achieve the desired results may hamper the financial performance of the company.

Outlook:

• The company is progressing well on its US FDA application clearance for the EasyScreen^TM Enteric Protozoan Detection Kit.
• The company is working on a next-generation product sample, which is expected to be completed in the next two years. Additionally, the company 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 the coming months.

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 been corrected by ~30.26% in the past six months. Currently, the stock has a 52-week’s high and low level of $2.94 and $1.04, respectively. 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 median, 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), Nanosonics Ltd (ASX: NAN), Medical Developments International Ltd (ASX: MVP), to name a few. Considering higher demand from SARS-CoV-2 testing Kit, zero debt as on 31 March 2021, robust 3QFY21 performance, encouraging long-term outlook, current trading levels, valuation, and key risks associated with the business (as stated above), we recommend a “Speculative Buy” rating on the stock at the current market price of $1.325 (as on 21 July 2021, 12.35 PM (GMT+10), Sydney, Eastern Australia).

GSS Daily Technical Chart, Data Source: REFINITIV

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

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.

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.

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