Resonance Health Limited

Company Overview: A healthcare technologies and services company, Resonance Health Limited (ASX: RHT), is engaged in developing and delivering non-invasive medical imaging software for the quantitative analysis of radiological images in a regulated and quality-controlled environment. The company has achieved regulatory clearances for a broad array of Software as a Medical Device (SaMD) products in the US, Europe, and Australia.

RHT Details

Encouraging Outlook & Decent Fundamentals to Aid RHT: Despite economic uncertainties, RHT has depicted various trails to offer robust earnings and remains on track to continue its growth trajectory via geographical expansion, successful clinical trials, and higher commercial revenues.

RHT’s Key Sales & Marketing Strategies:

• Management Transition: The company underwent a period of several managers appointed, led by experienced medical sales and marketing executives. RHT recruited a USA Sales manager with more than 20 years of medical marketing and sales experience. It also appointed a Director of Global Marketing for another medical device company. Other recent sales appointments include a US-based clinical trial specialist, two new personnel in India, and new personnel in South Korea and the UK. The new recruitments are well aligned with the company's overall business strategy and will further strengthen its overall growth.
• Channel Partners to Drive Growth: The company relies heavily on its channel partners to deliver its artificial intelligence (AI) products to market and take the company to newer heights. Notably, AI in medical imaging and radiology is expected to have a CAGR of 35% for 10 years (2021-2031). The company remains well capitalised on this growth opportunity with its FerriSmart® and HepaFat-AI® products.
• Geographical Expansion: The company remains on track to roll out its new AI liver product ‘LiverSmart’ as early as December 2021. With R&D pipeline products, heightened sales resourcing, and its key products FerriSmart® and HepaFat-AI®, it will be able to strengthen its geographical footprints and grow in existing and essentially new, high potential markets, including Asia-Pacific (which accounts for 60% of the total world’s population, where illnesses connected to RHT’s products are prevalent).

The below picture depicts RHT’s growth momentum in Revenues since FY18.

Revenues Performance; Analysis by Kalkine Group

Key Findings from FY21 Results:

• Top & Bottom-line Details: Despite the impact of COVID-19, the company reported total sales revenue of $3.78 million, up 3% year over year in FY21. A higher revenue base aids the company to fund diversification and its growth strategies. NPAT for the period stood at $585,858, against a net loss of $715,076 in FY20, reflecting an ongoing focus on operating efficiency and rebasing of cost structures in response to COVID-19.
• Geographical Contribution: In FY21, the company derived ~31% of sales revenue from the United States and Canada, with the UK contributing 21% and the remaining coming from Europe, Australia, and Asia.
• Rise in Commercial Revenue: In FY21, commercial revenue stood at $2.19 million (accounted for 59% of total revenue), up from $2.01 million reported in the year-ago period.
• Other Key Developments: The company had received clearance for HepaFat-AI, a medical device from the US Food and Drug Administration. The company also executed a license agreement with Telethon Kids Institute and Erasmus University Medical Centre for the use of computed tomography (CT) Cystic Fibrosis lung dataset.
• Balance Sheet & Liquidity Position: RHT reported cash receipts from customers of $3.68 million, which reflects a rise of 2% year over year. The company exited FY21 with a cash balance amounting to $8.86 million, up from $6.97 million reported at the end of 30 June 2020. RHT is virtually a debt-free company, with lease liability amounting to ~$60.1k at the end of FY21.

Key Metrics: In FY21, EBITDA margin of the company stood at 15.5%, against a negative 21.5% reported in FY20.  The current ratio for FY21 stood at 15.84x, as compared to 2.95x of the industry median.

Profitability and Liquidity Profile; Analysis by Kalkine Group 

Top 10 Shareholders: The top 10 shareholders together form around 36.58% of the total shareholdings, while the top 4 constitutes the maximum holding. Panton (Simon Timothy) and SG Hiscock & Co., Ltd. are holding a maximum stake in the company at 16.02% and 6.55%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis:

• Lockdowns & Global Uncertainties:  The impact of COVID-19 due to global lockdowns and accessibility issues for patients to scanning centres may slightly impact the company’s earnings in the future.
• Customer Concentration: RHT relies on key channel partners to drive growth. Also, it derived 12% of its external customer sales revenue from one major customer. It operates in a highly competitive market and is prone to the risk of losing existing and new market share.
• Failure of Clinical Trials: 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 
• Forex Headwinds:Any adverse movement in foreign exchange price may impact the financial performance of the company.

Outlook: The company’s research and development pipeline revolve around AI, imaging, and molecular medicine. Looking ahead, the company is focused on the continued expansion of the distribution channels for its products. Further, RHT’s decent liquidity position, and a longstanding relationship with channel partners, are likely to aid growth momentum in years ahead. Thanks to its additional human resources, the company is scaling for growth in healthcare, which will assist RHT to educate channel partners, customers, clinicians, and key opinion leaders. The company’s decent financial position helps it penetrate the new and existing market, and identify clinical trials, particularly in the common fatty-liver disease market. The company is set to conduct its Annual General Meeting on 25 November 2021.

Stock Recommendation: The stock of the company has been corrected by ~44.99% in the past six months. Currently, the stock is trading below the average of its 52-week high and low levels of $0.325 and $0.080, respectively. On a TTM basis, the stock of RHT is trading at an EV/Sales multiple of 11.6x, lower than the industry average (Healthcare) of 13.9x, thus seems undervalued. Considering the higher revenue base, robust product pipeline, positive outlook, current trading levels, strong liquidity position, regulatory approvals, technical levels as mentioned below, valuation on TTM basis, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.105, as on 27 October 2021, 1:30 PM (GMT+10), Sydney, Eastern Australia.

Investors with high-risk appetite should evaluate this stock in view of the technical support and resistance levels as well as taking into consideration associated risks in stringent regulator landscape, failure of clinical trials, and foreign currency risks.

Technical Commentary:

On a daily chart RHT stock price are sustaining above the horizontal trend line support level at AUD 0.082 and continuously taking support of the same. The leading indicator RSI (14-period) is trading at ~47.33 levels indicating a positive momentum in the stock. An important support level for the stock, is placed at 0.082 while the key resistance level is placed at AUD 0.14.

RHT Daily Technical Chart, Data Source: REFINITIV

Note: The purple color line in the chart depicts RSI (14-period).

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

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.