Genetic Signatures Limited

Company Overview: Genetic Signatures Limited (ASX: GSS) commercialises its 3base™ proprietary platform technology, along with designing and manufacturing a suite of real-time Polymerase Chain Reaction (PCR) based products to identify infectious diseases under the EasyScreen™ brand.

GSS Details

GSS Rides on Decent Fundamentals & Strong Liquidity Position: 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 reported robust 1QFY22 results, with revenue growth on a year-over-year basis along with positive cash flow. Results were positively impacted mainly due to the demand from its customers in the wake of the new COVID-19 variant (Omicron).

Delve Into 1QFY22 Results (Period Ended 30 September 2021):

• Rise in Revenues: During the quarter, the company recorded robust revenues of $12.4 million, reflecting a rise of 129% over Q4FY21 and 18% on a year-over-year basis. The revenue growth was mainly backed by the demand for its EasyScreen™ SARS-CoV-2 Detection Kit in Australia.
• Adoption of 3base™ Technology: During the quarter, GSS undertook one key project, which is the development of its new next-generation “sample-to-result” instrument, exclusively designed for 3base™. In addition, robust demand for 3base™ technology was strong in 1QFY22, as SARS-CoV-2 outbreaks continued, uplifting GSS’ capabilities and the substantial scale-up of its manufacturing capacity.
• Strong Pipeline of New Tests: During the quarter, the company filed FDA submission of Enteric Protozoan Detection Kit along with TGA registration for the EasyScreen^TM STI / Genital Pathogen Detection Kit, depicting robust product line to be commercialised in Europe and UK. The company also established a new “fast” PCR test that lowers batch processing times by 1.5 - 2 hours.
• FDA Clearance: Currently, three sites are running FDA trials for GSS, with a minimum requirement of 500 samples per site. Post the FDA clearance, GSS strives to win 40% market share within a span of 5 years.
• Liquidity Position: GSS recorded cash inflows of $2.9 million in 1QFY22, with receipts from customers of $10.3 million. The company closed Q1FY22 with a cash balance of $33.0 million and nil debt.

Revenue Performance; Analysis by Kalkine Group

Digging Into FY21 Key Highlights:

• The company’s total revenue and EBITDA came in at $28.3 million and $3.2 million, respectively, in FY21. This depicts a rise from $11.26 million of revenues and $1.17 million EBITDA loss reported in FY20. The company remains on track to deliver on its growth strategies through a diversified product portfolio and expanding geographic reach.
• In FY21, the company reported its first significant net profit of ~$1.8 million, against a loss of $2.1 million reported in the year-ago period. Notably, gross profit on materials improved from 67% reported in FY20 to 70% in FY21.
• Additionally, the company also increased manufacturing capacity to deliver supplies to its customers across US, Europe, and Australia.
• At the end of FY21, the cash balance stood at $30.12 million, with lease liabilities amounting to ~0.4 million. Net operating cash inflow in FY21 stood at $4.19 million, against outflow of $9.49 million in FY20. Decent liquidity will aid GSS to attain its long-term objectives and will aid the company to enhance its shareholder value.

Key Metrics: The company is making efforts to improve its EBITDA margins, operating margins, and net margins. In FY21, the company’s current ratio stood at 10.3x, higher than the industry median of 2.97x.

Profitability Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 62.77% 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 26.21% and 14.89%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis:

• Clinical Trial Risk: The company’s operational and financial health could be impacted by the failure of an ongoing clinical trial.
• Regulatory Risk: GSS is exposed to a more complex regulatory environment; any non-compliance could lead the business to fines, penalties, etc.
• Stiff Competition: 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.
• Also, higher expenditure and adverse currency translations add to the woes. 

Outlook: SARS-CoV-2 has given the company access to several new customers in the USA, Europe, and Australia. The company 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 FY22, as SARS-CoV-2 outbreaks continue. The company is making massive progression 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.

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 ~19.51% in the past nine months. Currently, the stock is trading below the average of its 52-week’s high and low level of $2.13 and $1.04, respectively. The stock has been valued using an EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight discount as compared to its peers, 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 the purpose of valuation, peers such as Oncosil Medical Ltd (ASX: OSL), Trajan Group Holdings Ltd (ASX: TRJ), Anteotech Ltd (ASX: ADO), and others have been considered to name a few. Considering the robust 1QFY22 performance, FDA submission for the higher demand from SARS-CoV-2 testing Kit, healthy balance sheet, encouraging long-term outlook, current trading levels, indicative upside in the valuation, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of $1.32, up by ~0.38% as on 1 December 2021.

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.

Disclaimer

Kalkine New Zealand Limited is authorised to provide general advice only. The information on this website does not take into account any of your investment objectives, financial situation or needs. Before you make a decision about whether to acquire a financial product, you should obtain the Product Disclosure Statement from the product issuer. You should consider the appropriateness of advice taking into account your own objectives, financial situation and needs and seek independent financial advice before making any financial decisions.