Australia | Aug 26 2021
This story features NANOSONICS LIMITED. For more info SHARE ANALYSIS: NAN
While some brokers maintain valuation concerns, the Nanosonics share price rallied strongly on bullish revenue guidance and prospects for the launch of a new product in 2023.
-Revenue growth of 3% in FY21, while profit fell -15%
-Second half average consumables revenue rose strongly
-Potential revenue from new product to match Trophon?
-Independent review shows a rising addressable market
-Costs estimated to rise by 25% in FY22
By Mark Woodruff
Nanosonics ((NAN)) has demonstrated significant second half improvement in FY21 and momentum is expected to continue in FY22.
The company manufactures and distributes the fully automated system called trophon2 for disinfecting ultrasound probes and its associated consumables and accessories. It is also involved in the research, development and commercialisation of infection control and decontamination products.
There was a strong recovery in both capital device and consumables sales, confirming elective procedures are returning despite the ongoing pandemic. Consumable sales had been significantly affected due to restricted hospital access.
On results day, the share price responded with gusto to upgraded guidance and details of the next major product which has been much anticipated for over two years. The new Coris platform for automated endoscope cleaning is scheduled to launch in 2023.
Some features of the FY21 result included a 3% rise in revenue to $103m, while profit declined -15% to $8.6m after operating expenses increased by 9%.
There was a 24% increase in average consumables revenue per installed device in the second half, while the installed base itself increased by 20% in second half compared to the first. The US continues to be the major market, generating 86% of group revenues and accounting for the vast majority of the group’s global installed base.
Management has guided to double digit revenue growth and a gross margin of around 75%.
Addressable market grows
An independent review of the ultrasound market in the US resulted in an increase in the estimated total addressable market (TAM) to 60,000 units from 40,000. This implies Nanosonics has a market share of 39% compared to the prior estimate of 49%.
A review of the European and rest of the world (ROW) markets has not been undertaken but is assumed by management to be understated.
Following the strong second half performance, Morgans thinks it likely that installed base growth of 2,700 to 3,000 units is a reasonable forecast moving forward. The broker increases its target price to $7.26 from $6.57 and lowers its rating to Hold from Add as a result of the recent share price rally.
The increase in consumables revenue per device in the second half drives US$5.5m in additional revenues, estimates Bell Potter. It’s expected the increased utilisation rate will continue into FY22 and is a key factor in the analyst’s material upgrades to forecast revenues.
The broker, not one of the seven stockbrokers monitored daily on the FNArena database, lifts its price target to $6.35 from $4.50 and maintains its Sell rating (last close $7.00).
After costs fell short of management’s guidance in FY21, management has predicted they will lift by nearly 25% in FY22 to $90m. As a result, Ord Minnett reduces its earnings forecast by -23%. This comes after operating expenses rose to a run-rate of about $82m in the final quarter of FY21.
The company expects to enter the flexible endoscope re-processing market, potentially in 2023, with its new technology “Nanosonics Coris”. It is a completely new approach to high level disinfection of these devices.
Bell Potter believes the annual value of revenues in Australia, the US and Europe is likely to be at least as large as the Trophon market.
While too early to place clear metrics on the opportunity, Ord Minnett has added 60 cents to its company valuation, given the increased certainty the product will proceed to market. The broker retains its Hold rating and increases its target price to $6.40 from $5.40.
Bell Potter agrees and lifts its price target to $6.35 from $4.50, largely because of decreased execution risk attached to the new technology platform. The broker, not one of the seven stockbrokers monitored daily on the FNArena database, retains its Sell rating in the absence of meaningful earnings growth.
Wilsons, also not one of the seven, drives home the importance of the new product by assigning $2.46 of valuation for Coris. It’s thought the platform may generate $20-25m in earnings (EBITDA) after 3-5 years from the launch date.
As a result the broker raises its rating to Market-Weight from Underweight and lifts its target price to $7.18 from $4.00. This also incorporates an 18% increase in the Trophon valuation due to the aforementioned TAM upgrade and increased usage of consumables to levels at or above pre-covid.
FNArena’s database has four broker ratings with one Buy ratings, two Holds and a Sell with a consensus target price of $6.24, which signals -10.9% downside to the last share price.
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