Short-Term Risks Remain For Nanosonics

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Heightened interest in infection prevention should be of benefit to Nanosonics in the wake of the pandemic, although rising cases in the short term create risks.

-Further clarification on launch of Trophon2 required at the AGM
-Revenue could be affected by high distributor stocks
-Rising coronavirus cases could mean elective procedures fall again

By Eva Brocklehurst

Nanosonics ((NAN)) has started FY21 with a strong recovery in the installed base of its high-level disinfection product, Trophon2, with consumables volumes moving back towards more usual levels.

Unit purchases of consumables were up 4% on the prior corresponding period, a 25% recovery from the fourth quarter. Without the growth in the installed base, Ord Minnett estimates consumables sales would have been down -5-10% as utilisation rates per device moderated.

Morgans found the update positive and an improvement on earlier commentary, as management had expected more modest growth in the installed base over the first half while hospital access was an issue.

Nanosonics did not provide any FY21 guidance, although the fears of lower installed base growth appear to have eased. Japan is expected to become an important market going forward. Newly installed Trophon units were at 91% of the prior corresponding period. This is ahead of expectations and UBS considers the news positive for the revenue profile of consumables.

Bell Potter explains the volume of consumables sold is a function of the installed base and utilisation rates, expecting the global installed base to increase by 10% in FY21 and also noting Nanosonics is significantly exposed to the stronger Australian dollar and does not hedge its net FX exposure.

Brokers require further information from the AGM on November 24 in order to assess the outlook further. Ord Minnett is hopeful of clarification on the impact of continued destocking by GE Healthcare and also expects confirmation the second product launch is on track.

Morgans assumes that a second product will be launched commercially in FY22 and contribute to 17% and 23% of revenue in FY22 and FY23, respectively. The main downside is further delays in securing regulatory approval.

Citi interprets the update to mean a partial recovery and expects further improvement through the rest of the financial year. The broker expects first half revenue growth of 5% with a contraction of -3% in consumables and an increase of 23% for devices.

While cautiously optimistic about a new product, the current share price is implying an accelerated launch in a significantly large market and Citi considers this overly optimistic.

Risks

The pandemic has continued to affect the rate of new units being installed, although there are signs of recovery the broker notes, and rising cases of coronavirus and the lockdowns remain a risk to current momentum.

The company has suggested US hospitals are now better able to handle the subsequent waves of the disease and ultrasound procedures are not being affected as badly as before.

Goldman Sachs considers it possible hospitals will remain constrained and while the value proposition of Trophon is strong there are alternatives available. Yet the broker anticipates an increase in penetration to 73% by FY23, from 52% in FY20.

Moreover, a vaccine for covid-19 should lead to a rise in procedures, Goldman Sachs ascertains, and demand for consumables should rise in tandem. On balance, the broker believes there is more chance Nanosonics will deliver on expectations, amid a relative lack of competitive threat and a compelling, proven technology.

UBS continues to believe Nanosonics is a high-quality structural growth story and the infection prevention theme is likely to be centre stage after the pandemic. The company should be able to capitalise on this with new product IP, underpinned by strong balance sheet.

While the recovery in installed units is positive, the broker points out this is not indicative of the number of units sold and revenue could be affected by high stock levels in the distributor channel.

Ord Minnett remains concerned that capital budgets in hospitals will be constrained well into FY22 and may potentially reduce demand for new Trophon units and upgrades. The broker also fears the rapid rise in coronavirus cases, particularly in Europe, could once again mean elective procedures, including those requiring ultrasounds, are put on the back burner.

This risk, coupled with the delayed timing of GE Healthcare's purchase of Trophon2 units, has led to lower capital sales estimates and a -6% reduction in Ord Minnett's forecasts.

Among those stockbrokers not monitored daily on the FNArena database, Goldman Sachs has a Neutral rating and $5.50 target while Bell Potter maintains a Sell rating with a $4.95 target on the basis there is insufficient data on new products to justify the implied valuation.

The database has two Buy and two Sell ratings with a consensus target of $5.80, signalling 2.7% upside to the last share price. Targets range from $4.15 (Citi) to $7.20 (UBS).

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