Company Overview: PolyNovo Limited (ASX: PNV) is a medical device company engaged in designing, developing, and manufacturing dermal regeneration solutions utilising its patented technology. The company’s development program covers Breast Sling, Hernia, and Orthopedic applications. NovoSorb® is a distinctive range of bio-resorbable polymers produced in formats such as film, foam, fibre, and coatings.

PNV Details

PNV Rides on Geographical Expansion & Decent Fundamentals: In 1HFY22, the company opened 35 new accounts across all direct markets, bringing the total number to 154. In addition, the company’s rate of account acquisition is witnessing a growth trajectory, with 16 new accounts addition in Q1 and 19 in Q2. With respect to the US, the company recorded an increase of ~96% year over year in sales in January 2022. Q2FY22 sales from the US went up a whopping 21% on a quarterly basis.

Focus on 1HFY22 Key Numbers:

• Increase in Receipts from Customers: In 1HFY22, the company has reported improved receipts from customers to $15.87 million, compared to $10.74 million on a pcp basis. Notably, in 1HFY22, one customer (BARDA) in the U.S., accounted for 10% of total sales revenue from contracts with customers.
• A Turnaround in Profit: In 1HFY22, net profit stood at ~$1.62 million, against a loss of ~$3.53 million reported in the year-ago period, owing to robust revenue growth. The profit comprises the reversal of share awards and share options of $4,708,151 forgone by the CEO and COO upon their letter of resignation during the period.
• Rise in Operating Expenditure: In 1HFY22, the company’s operating expenditure stood at ~$19.7 million, depicting a rise of ~53% year over year, owing to the continued investment in commercial sales of NovoSorb® BTM locally and internationally, along with increased headcounts.
• Impressive Top-line Growth: For the year ended 31 June 2021, the company posted a growth of ~41.9% in revenue to $18.2 million as compared to $12.8 million in 1HFY21, driven by the benefit from higher sales of NovoSorb® BTM.
• Robust Sale of NovoSorb® BTM: PNV remains on track to benefit from higher sales of NovoSorb® BTM, which skyrocketed ~44.6% in 1HFY22 from the previous corresponding period. The group’s investment in expanding the sales teams has yielded significant growth in sales and the rate of customer acquisition. Notably, NovoSorb® BTM is sold directly by PNV salesforce in Australia, the U.S., New Zealand, the U.K., Ireland, Singapore & Malaysia.
• Balance Sheet & Liquidity Position: The company’s cash position stood at ~$3.29 million as of 31 December 2021. At the end of the period, the company's total debt stood at ~$10.87 million. 

Geographical Highlights; Analysis by Kalkine Group

Key Metrics: EBITDA margin for 1HFY22 stood at ~14%, which is higher than the year-ago negative figure of ~13%. Net margin for the year stood at ~8.9%, better than the prior corresponding year’s net margin of -28.1%.

Profitability Profile; Analysis by Kalkine Group 

Sale & Leaseback Transaction: In a recent update, the company informed the market that it had completed the due diligence and the exchange of an unconditional contract for the sale of its Port Melbourne headquarters, for a selling consideration of $6.35 million. PNV intends to use $3 million of the proceeds to reduce debt and the balance for working capital.

Top 10 Shareholders: The top 10 shareholders together form around 15.72% of the total shareholdings, while the top 4 constitutes the maximum holding. Williams (David John) is the entity holding maximum shares in the company at 2.86%. The Vanguard Group, Inc. is the second-largest shareholder, with a holding of 2.32%, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis:  The company is exposed to foreign currency risk, interest rate risk, liquidity risk and credit risk. Also, the increased costs and expenses related to product development using a costly technology and pipeline setbacks are a few major headwinds. The company is also exposed to shorter-term disruptions hindering from challenging macro-economic environment due to COVID-19 led outbreak. Further, stiff competition from peers, strict regulatory requirements, and a leveraged balance sheet, adds to the woes.

Outlook: The company rides on greater geographic reach and increasing customer referral networks. PNV remains on track to invest higher in expanding its business strategies and research and development programs to enter new markets, grow market share and commercialise its new products. In 2HFY22 and FY23, PNV expects to increase sales teams to intensify sales effort in direct markets, optimise distributor and emerging markets models, and expand the Key Opinion Leader program (especially UK & EU). Last but not least, it remains well equipped with Hernia repair device development and expects to bolster its foothold in the US market in years to come.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative) 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: Currently, the stock is trading below the average of its 52-week’s high and low levels of $3.19 and $0.835, respectively. The stock of the company has been corrected by ~39.28% in the past six months. The stock of the company has been valued using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight discount compared to its peers, considering customer concertation risk, COVID-19 led uncertainties, leveraged balance sheet, regulatory measures, etc. For the purpose of valuation, peers such as ImpediMed Ltd (ASX: IPD), Imricor Medical Systems Inc (ASX: IMR), Nanosonics Ltd (ASX: NAN), and others have been considered. Considering a diversified portfolio, decent top-line growth, a turnaround in profits in 1HFY22, geographical expansion, decent long-term outlook, current trading levels, indicative upside in valuation, and key risks related to the business, we recommend a “Speculative Buy” rating on the stock at the closing market price of $1.16, up by ~4.977% as on 23 March 2022.

Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

PNV Daily Technical Chart, Data Source: REFINITIV 

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.

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.

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