Small Caps | Feb 27 2018
This story features NANOSONICS LIMITED. For more info SHARE ANALYSIS: NAN
Has a buying opportunity presented in Nanosonics after the first half fell short of expectations?
-Earnings hit reflects inventory timing and likely to be temporary
-Trophon forecasts centre on expanding the installed base
-High expectations for new products to be launched in FY19/20
By Eva Brocklehurst
Nanosonics ((NAN)), a producer of high-level disinfection solutions for medical devices, disappointed the market with a first half result that was well behind forecasts. Sales fell -4%, reflecting a reduction in consumables and accessories provided to distributor GE Health.
Revenue took a hit, despite 86% growth in UK units and sales in the German and Middle Eastern markets, because of a stock order by GE that affected reported sales. GE installed new units from its inventory rather than purchase from Nanosonics.
This is primarily a timing issue, Canaccord Genuity contends, as the main metrics for investors centre on expanding the installed base, which should drive long-term growth in consumables.
In the UK the installed base is expected to grow by 100% in FY18. The company has also reached a new agreement, effective July 2019, which is expected to provide a material increase in revenue and margin from the sale of consumables to the existing GE Health base.
Management is pursuing growth options in Europe amid several new product campaigns and this makes FY18 an intensive year for investment. At the same time, the company is making it easier for clinics to obtain its key product, Trophon.
In some cases this is the at the expense of upfront revenue as the company seeks to grow the installed base. Shareholders, Wilsons suggests, should enjoy a major pay-off from the annuity profit base growing at double-digit rates.
Canaccord Genuity agrees the key for the Trophon business is about expanding the base. This could ultimately make it the standard of care, as well as drive annuity revenue from the sales of high-margin consumables.
The US has achieved around a 35% market adoption and Australasia around 70%. The broker also expects an uptick from July 2019 when GE moves to re-seller arrangement that puts Nanosonics in charge of all US consumables sales.
The main risk to forecasts, Morgans believes, is a slower ramping up of sales in the US. The Trophon installed base in the US increased by 1700 units to 14,100.
Morgans believes the reaction in the share price to the results means a buying opportunity is presented. The broker expects further investment in new products will drive growth and maintains an Add rating. Target is $3.22.
Wilsons reduces FY18 net profit estimates by around -$5m to reflect lower sales and an increase in R&D expense. This broker also believes investors should take advantage of the share price weakness and maintains a Buy rating and $3.34 target.
Canaccord Genuity downgrades to Hold from Buy, expecting the stock to come under near-term pressure until the growth drivers kick in. Target is $2.55.
Bell Potter believes the stock remains expensive, although FY18 was always going to be a year of investment. The broker continues to expect stronger earnings growth in FY19 as the US base expands and Trophon gains traction in Europe. The broker has a Hold rating and $2.48 target.
Further Product Development
Management has held back on releasing other products in the R&D pipeline for competitive and IP protection reasons, Wilsons notes. These should be launched over FY19-20 and improve the existing sales in infection control mechanisms.
Canaccord Genuity expects the new products in the pipeline, including a second-generation Trophon that is expected to have a higher price point, could all be launched in the next 18-24 months and target the same customers through the channels that have been developed for Trophon.
In the past, product development candidates have included high-level disinfection solutions for trans-oesophageal echocardiogram probes and endoscopes. In both instances this would represent market opportunities at least on par with Trophon, Wilsons believes.
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