Consumables Income Flows For Nanosonics

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While the US market dominates earnings for infection control developer Nanosonics, other markets are growing rapidly.

-Earnings from consumables growing substantially
-Launch of Trophon-2 temporarily impacts device sales in US
-New products for infection control slated by the end of FY20
 

By Eva Brocklehurst

Disinfection device developer Nanosonics ((NAN)) reported a 25% increase in its installed base of its infection control device Trophon in FY18. The vast majority of this growth is in the US, although momentum has picked up in the UK with a management equipment service agreement.

FY18 revenue was below forecasts, down -10% because of a large order by GE in FY17 and slowing sales in the second half, but net profit was substantially ahead because of the recognition of previously unrecognised tax losses in the US. This is expected to be a one-off item.

The market was clearly prepared for a softer result as the company increased its investment in new product development and infrastructure and there was a temporary impact on device sales in the US because of the launch of Trophon-2.

The US market continues to dominate revenue and earnings, although other markets are growing rapidly. The North American installed base now reflects a 39% market penetration.

Canaccord Genuity expects first half FY19 sales will be supported by Trophon-2 as well as initial orders from GE. Meanwhile, UK agreements, while not generating revenue from upfront sales, should provide stronger, long-term annuity revenue from the higher priced consumables.

Reported consumables now account for around 58% of revenue and, while the proportion is likely to be elevated in FY18 by reduced device sales, Canaccord Genuity believes this demonstrates the company's robust commercial model.

The broker also expects France and Germany to make a greater contribution to the accounts in FY19 and clinical data to support approvals and guidelines in Japan is expected shortly. Canaccord maintains a Hold rating, increasing the target to $2.95.

Wilsons also expects increased consumable earnings will manifest in the second half of FY19 and be boosted again in FY20, maintaining a Hold rating and $3.50 target. Although the broker views the business quite favourably the stock is assessed as fairly valued. Nanosonics guided to $53m in operating expenditure but did not provide formal guidance beyond that.

Bell Potter is optimistic about the outlook, amid expectations for double-digit growth in the installed base and the launch of Trophon-2. In view of the recent appreciation in the share price the broker downgrades to Hold from Buy, with a target of $3.42.

The release of one or more new products for infection prevention are slated by the end of FY20. To fund development management has guided to $13m in research & development costs in FY19, up from $9.9m in FY18.

Morgans suggests investor attention should be held by the growing revenue from consumables and the new products being launched. Upside risk centres on a higher rate of adoption in Europe, while downside risk centres on pricing pressures if hospital budgets tighten. Morgans maintains a Hold rating and looks for a better entry point to the stock, retaining a target of $3.32.

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