Nanosonics Limited

Company Overview: Nanosonics Limited (ASX: NAN) offers innovative solutions to prevent the transmission of potentially life-altering infections. The company is engaged in the production and distribution of the trophon® ultrasound probe disinfector. NAN is also involved in exploring, developing, and commercialising infection control and decontamination products and correlated technologies.

NAN Details

NAN Rides on Geographical Diversification & Robust Product Adoption: Amid the rapid increase in infections related to the Delta and the Omicron variants, NAN maintained its positive momentum and witnessed decent growth in 1HFY22 compared with the 1HFY21 financial year.

Spotlight on 1HFY22 Results (Period Ending 31 December 2021):

• Impressive Revenue & Earnings Growth: The company has generated revenue of $60.6 million in 1HFY22, depicting an increase of 41% year over year and 1% on prior half, primarily due to stronger installed base evolution across all regions, continued investments in product development strategy, and development activities related to NAN’s new endoscope reprocessing product platform. Operating profit before tax for the period stood at $3.3 million, up from $0.2 million reported in the year-ago period.
• Rise in Global Installed Base: In 1HFY22, global installed base increased 12% year over year and came in at 28,160 units. It is worth mentioning that the company witnessed general improvement in 1QFY22 and Q2FY22, with a new installed base growing 14% QoQ in 2QFY22.
• Higher Consumables & Service Revenue: Revenues from consumables and service increased 23% year over year and came in at $41.6 million. The growth reflected the recovery in ultrasound procedure volumes, along with the growing installed base.

• Robust Investments: During the period, the company remained on track to invest higher in its growth strategy. The ongoing investment in strategic growth agenda, increased operating expenses by 29% on prior corresponding period.
• Trophon® Opportunity: In 1HFY22, the company marked an increase in trophon® opportunity in North America, owing to the higher estimated Total Addressable Market (TAM). The North American installed base accounted for 41% of the estimated TAM of 60,000 units, indicating development in the ultrasound market.
• Balance Sheet & Liquidity Position: The company exited 1HFY22 with a cash balance amounting to $91.9 million. The company's total debt stood at $5.6 million at the end of 1HFY22. Decent cash position continues to provide a strong foundation for growth investment.

Key Trends; Analysis by Kalkine Group

Key Metrics: In 1HFY22, the gross margin of the company stood at 76.5%, higher than the industry median figure of 67.7%.  The current ratio for 1HFY22 stood at 7.31x, as compared to 3.18x of the industry median.

Profitability Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 46.76% of the total shareholdings, while the top 4 constitutes the maximum holding. Fidelity Management & Research Company LLC and Stang (Maurie) are holding a maximum stake in the company at 9.56% and 6.81%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Key Risks:  The company is exposed to the risk of uncertainties associated with COVID-19 that would extend the timeline for adoption of trophon® by some customers and could lead to disruption in the global supply chain. It operates in a highly competitive market and is prone to the risk of losing existing and new market share. The clinical trial process is designed to assess the safety and efficacy of a medical device before commercialisation. A failure to achieve the desired results may hamper the company’s financial performance.

Outlook: Considering positive market recovery trends in 2HFY22, the company expects double-digit revenue growth in FY22. This will be supported by constant growth in installed base globally (particularly North America) and higher usage of consumables across all regions. It expects a gross margin of over 75% in FY22. For FY22, total operating expenses are expected to be ~$93 million. Additionally, to manage a growing installed base, the company aims to deliver continuous value over the lifetime of trophon by driving enhanced compliance with HLD standards.

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 ~41.4% in the past six months. Currently, the stock has a 52-week high and low level of $7.52 and $3.7, 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 some discount compared to its peers, considering the adverse foreign currency impact, higher R&D expenditure, regulatory concerns, etc. For the purpose of valuation, peers such as PolyNovo Ltd (ASX: PNV), ResMed Inc (ASX: RMD), Fisher & Paykel Healthcare Corporation (FPH) have been considered. Considering the aforesaid fact, growing addressable market, robust demand for trophon® eco-system, decent liquidity position, growth in the global installed base, decent long-term outlook, current trading levels, upside in valuation, and key risks associated with the business, we recommend a “Speculative Buy” rating on the stock at the closing market price of $3.75, down ~3.101% as on 16 March 2022. Markets are currently trading in a highly volatile zone due to certain macro-economic issues and prevailing geopolitical tensions. Therefore, it is prudent to follow a cautious approach while investing.

NAN 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:-

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.

Disclaimer

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