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

International Expansion & Higher Investment to Aid GSS: A molecular diagnostics company, Genetic Signatures Limited (ASX: GSS) focuses mainly on the development and commercialisation of its proprietary 3base™ platform technology, which reduces the genetic complexity of infection detection in molecular testing. The company’s effort in the past financial years has successfully given rise to substantial commercial success for the company. GSS has established itself as a global supplier of COVID-19 tests, in the challenging environment induced by coronavirus outbreak. The company remains on track to respond quickly and effectively, to the COVID-19 led demand and develop COVID-19 test kits to address the worldwide health emergency.

During FY20, the company’s revenues came in at $11.3 million, skyrocketing 131%, from the prior year corresponding figure of $4.9 million, owing to rapid development of the company’s COVID-19 test kit facilitating significant domestic and international sales. With robust sales of both diagnostic kits and instrumentation, the company has strengthened its foothold in Europe. Notably, the company also recorded a profit in 2HFY20, depicting its decent financial position. The company remains confident while entering FY21, on the back of its international expansion, and is likely to witness decent revenue growth from the international market. The global COVID-19 pandemic has established prospects to gain traction with numerous customers in a number of European countries, and the company remains well dedicated on driving further customer acquisitions in this region. The company is also taking the necessary steps to strengthen its position in North America, the largest molecular diagnostics market opportunity globally. Further, GSS’s US sales team is aggressively tracking COVID-19 prospects under the recent FDA Emergency Use Application (EUA) advice, aiding the company to fight against the virus with 3base™ technology.

The company remains well equipped and entered the COVID-19 pandemic phase in a strong position. In October last year, the company raised a total of A$37.5 million under Placement to institutional and sophisticated investors (A$35 million) and share purchase plan (A$2.5 million) to support global expansion. The company intends to utilise the raised funds for its global marketing and sales expansion in key international markets and advance product development.

Revenue Trend (Source: Company Reports)

Sneak Peek at FY20 Key Financial Highlights: For the period ended 30 June 2020, the company total revenues increased 131% over the previous year. Sales to European customers represented ~10% of total sales for the year. During the period, the company reported net loss of $2.09 million, as compared to a loss of $3.39 million in FY19. It is worth mentioning that GSS recorded a profit in 2H of $260,000, owing to higher impact of sales. The company reported gross margins of 62%, marginally lower than the previous year, due to pandemic induced higher prices for some raw materials, product mix and substantially higher transport costs. In FY20, expense went up 35% year over year and came in at $6.6 million, owing to the hiring of additional personnel to the teams in Europe, USA, and locally across all functions.

FY20 Key Highlights (Source: Company Reports)

Decent Balance Sheet Position: The company reported $46.2 million of total current assets, including cash amounting to $31.18 million and trade and other receivables at $5.2 million. Total equity stood at $45.9 million as on 30 June 2020. Lease liabilities stood at ~$0.74 million, at the end of the period. Net cash outflow from operating activities came in at $9.49 million while net cash outflow from investing activities was at $2.35 million. The company’s $34.7 million capital raising program to accelerate its commercialisation strategy, aided the company to scale up for the increased demand from SARS-CoV-2 testing. The company is proud to claim that all its customers have been with the product to undertake testing to date.

September Quarter Update: During the quarter, the company reported revenues of $10.5 million, which skyrocketed 50% from the prior quarter and 585% on year over year basis. The company added ~$3.4 million in net cash from operating activities during the quarter. Receipts from customers were $11.4 million, with EMEA sales growing more than 70% on a sequential basis and accounted for greater than 15% of total quarterly revenue. The company received approval from FDA to supply EasyScreen™ SARS-CoV-2 Detection Kit to USA laboratories, which is specialised to perform high complex testing under a Section IV.c exemption. As at 30 September 2020, the company’s cash balance stood at $33.2 million, with nil debt.

Quarter Highlight (Source: Company Reports) 

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 53.29% of the total shareholding. Asia Union Investments Pty. Ltd. is the entity holding maximum shares in the company at 26.54%. Perennial Value Management Ltd. is the second-largest shareholder, with a holding of 13.48%.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Metrics: 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 in 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 is optimistic about business growth, looking at the potential contribution from its 3base™ technology and decent liquidity position.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Key Risks: The company’s financial instruments comprise mainly of receivables, payables, bank loans and overdrafts, finance leases, loans from related parties, cash, and short-term deposits. The main risks GSS is exposed to through its financial instruments are foreign currency risk, interest rate risk, liquidity risk and credit risk. Also, stiff competition from peers remains a potential concern. Further, COVID-19 related uncertainties and higher operating expenditure may weigh on financial performance, going forward.

What to Expect: The company remains on track to stay afloat in the current pandemic situation on the heels of its 3base^TM technology. The company opines that its US sales team is actively following a number of sales leads. Going forward, the company expects to build inventory of its kits to continue to supply new North American customer contracts, as North America represents the largest diagnostics market globally. This, in turn, will represent a step change in revenue. The company aims to become a global leader in the supply of diagnostic solutions for the rapid discovery of infectious diseases. The company also aims to reduce costs, through minimising work and maximising results. Going forward, the company remains well committed to attain a number of commercial milestones including high revenue growth, improving shareholders value, and community health across the globe.

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 stock of GSS gave a positive return of 9.3% in the past one month. The stock of the company is currently trading slightly above the average of its 52-week trading range of $0.900- $2.94. On the technical analysis front, the stock has an immediate resistance level of ~$2.061 and a support level of ~$1.61. 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 OncoSil Medical Ltd (ASX: OSL), Medical Developments International Ltd (ASX: MVP), and SomnoMed Ltd (ASX: SOM), to name a few. Considering the current trading levels, decent balance sheet position, robust adoption of its new products and technologies, and positive long-term outlook, we recommend a “Buy” rating on the stock at the current market price of $1.99, up by ~1.015% on 28 October 2020. 

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

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