Company Overview: Atomo Diagnostics Limited (ASX: AT1) is an Australia based medical device company, which is engaged in the development and supply of unique, integrated rapid diagnostic test (RDT) devices to the global diagnostic market. The company is currently increasing its market traction in the US, Europe and global health markets by selling approved Atomo finished tests to healthcare distributors and Atomo devices to diagnostic customers.
AT1 Details
Decent Liquidity Position to Support Business Growth: Atomo Diagnostics Limited (ASX: AT1) mainly develops, manufactures and sells innovative patented products which simplify rapid testing. The market capitalisation of the company stood at ~$174.90 million as on 11th December 2020. The company’s business model comprises of selling finished test products and original equipment manufacturer (OEM) devices. The corresponding marketing strategies of the company enables the business to increase commercial opportunities in rapid test applications and geographies. As a response to the COVID-19 pandemic, the company has inked agreements with Access Bio and NG Biotech for commercialisation of each company’s COVID 19 antibody rapid diagnostic test on its platform. As a result of this agreement, the company is covering North American, European and Australian markets.
The strategic priorities of the company revolve around increasing device sales revenues with the help of new OEM contracts in current lateral flow rapid test markets. For that, the company has appointed a US-based Business Development resource and also initiated OEM engagement program. Moreover, the company is focused on launching new Finished Products in high-value segments in primary care POCT and emerging consumer health segments, which will support its topline growth in years to come. For 2H FY21, the company is expecting to sign new OEM sales contracts and also planning to rollout a digital solutions program for assisting the rising transition to decentralised healthcare.
For the quarter ended 30th September 2020 (Q1 FY21), the company reported a rise of 65% in cash receipts from customers to $3.04 million as compared to $1.84 million in Q4 FY20. During the quarter, the company recorded positive operating cash flow of $339k. As on 30th September 2020, the company had a cash balance of $26.35 million and nil debt. From 2018 to 2020, the company has witnessed significant topline growth, rising from revenue of ~$0.29 million in FY18 to revenue of ~$5.37 million in FY20, depicting a compound annual growth rate (CAGR) of ~330.3%.
Annual Sales Revenue Trend (Source: Company Reports)
Positive Cash Flow in September 2020 Quarter: During Q1 FY21, the company achieved numerous material new COVID-19 commercial and regulatory milestones, which supported the company in becoming cash flow positive. AT1 recorded revenue (unaudited) amounting to around $2.5 million in Q1FY21. In addition, the company witnessed strong customer demand, fueled by COVID-19 point of care antibody testing. With respect to expansion in India, the company inked an agreement with DIVOC Labs for the non-exclusive rights to sell its COVID-19 rapid antibody test in September 2020. The company has received a commitment for an initial order of 77,000 units from DIVOC. This will be effective upon receipt of regulatory approval by DIVOC for the professional use of the product in India.
Repayment of All Debts: FY20 proved as a transformational year, supported by successful IPO and listing on the Australian Securities Exchange on 16th April 2020, wherein, it raised $30 million. The company’s FY20 growth was also supported by the signing of material commercial customer agreements and improved growth in its revenues. AT1 reported revenue amounting to $5.37 million with the growth of around 10x over FY19. This substantial topline growth was due to the acceleration of HIV rollout via Mylan and demand of COVID-19 antibody testing devices. In addition, the company noted an underlying EBITDA loss of ~$2.4 million, reflecting a decent improvement from FY19 loss of ~$4.1 million. Gross margin for the year stood at 60% as compared to 18% of FY19. This growth was supported by benefits achieved from a move towards more efficient economies of scale and higher margins from the sale of COVID-19 test. During FY20, the company repaid all its debt by using its IPO proceeds and finished FY20 with a cash position of ~$27 million.
FY20 Income Statement (Source: Company Reports)
Details of Top 10 Shareholders: The following table provides an overview of the top 10 shareholders of Atomo Diagnostics Limited. Dalraida Holdings Pty. Ltd is the largest shareholder in the company, with the percentage holding of 16.24%.
Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)
Key Ratio Metrics: Over the past years, the company has showcased decent improvement in its profitability ratios (EBITDA Margin, Operating Margin and Net Margin). On the liquidity front, the company reported current ratio of 21.94x as compared to the industry median of 2.35x, which indicates that the company is in a decent position to address its short-term obligation against the broader industry. Cash cycle for the year stood at 247.4 days against 1,707.2 days in FY19. On the leverage side, the company reported asset to equity ratio of 1.05x, which is lower than the industry median of 1.59x. In addition, debt to equity for FY20 was nil, which showcased the deleveraged position of the business.
Key Margins (Source: Refinitiv, Thomson Reuters)
Signing of Agreement with PrEP Health Pty Limited: On 7th December 2020, the company announced that it had inked an agreement with PrEP Health Pty Ltd, wherein, it would distribute Atomo HIV Self-Test through online PrEP subscription service in Australia. Under the terms of the agreement, PrEP Health Pty Ltd is committed to purchase minimum 10,000 HIV tests from Atomo during CY21 for deployment in Australia. Both the parties to the agreement have also showcased their interest in growing this arrangement to international markets.
Approval from TGA: In the month of November 2020, the company has received approval from Therapeutic Goods Administration (TGA) for its AtomoRapid HIV 1&2 rapid diagnostic test (RDT) for use by medical professionals in point of care settings in Australia. Following this approval, the company has manufactured ample quantities of the product in preparation for its commercial launch in early CY21 in Australia.
Key Risks: The company’s business is sensitive to the rising market share of competitors and disruptions in the industry in which it operates. Also, the failure in receiving approval may act as a headwind for the business. In addition, the business is also exposed to financial risks, such as credit risk, liquidity risk, credit risk and market risk (including foreign currency risk, price risk and interest rate risk).
What to Expect: For 2H FY21, the company plans to set up US business and dedicated resources for assisting increased focus on US market scale up. Looking forward, the company is planning to tap opportunities in Australia for sale of a combination rapid COVID-19 screen (both antigen and antibody testing) into the local market. In addition, the company is working on developing and expanding new Atomo rapid diagnostic finished products. The company seems to be well-placed for sustaining meaningful growth rates in the Finished Products and OEM contracts. In addition, the company is well- capitalised to deliver on its advised global strategy with the combination of recurring revenues growth with established partners and proven responsiveness to emerging opportunities. Further, the company aims to produce 1.7 million devices monthly by the end of FY21.
Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)
Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)
Price to Earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months
Stock Recommendation: The company is focused on increasing its production capacity so that it can match the demand arising from existing contracts and to bring new pipeline opportunities to the market. The stock of AT1 has corrected by 7.46% and 15.06% in the last one and three months, respectively. Currently, the stock is trading towards its 52-week low levels of $0.280, offering decent opportunities for accumulation. On a technical analysis front, the stock has a support level of ~$0.305 and a resistance level of ~$0.360. We have valued the stock using the price to earnings multiple based illustrative relative valuation and arrived at a target price with an upside of low double-digit (in percentage terms). Therefore, considering the cash rich position, repayments of all debts, robust growth in topline, focus on increasing production capacity, demand for its products, and key risks associated with the business, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.310 per share with no change on 11th December 2020.
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AT1 Daily Technical Chart (Source: Refinitiv, Thomson Reuters)
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