Company Overview: Atomo Diagnostics Limited (ASX: AT1) is one of the world leaders in manufacturing and development of medical devices. The specialization of the company revolves around creating an integrated rapid diagnostic test (RDT) platform for blood-based testing. AT1 also provides OEM product development services to specialist diagnostic companies globally. 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
Debt-Free Balance Sheet to Aid Business for Future Growth: Atomo Diagnostics Limited (ASX: AT1) is engaged in the expansion of global sales and continued development of its rapid test device technologies. The market capitalisation of the company stood at ~$160.79 million as on 12th February 2021. AT1 successfully debuted on Australian Securities Exchange (ASX) on 16th April 2020 with IPO proceeds of $30 million through the issue of 150,000,010 ordinary shares at an issue price of $0.20. The company expanded its production capacity and doubled its production capacity to 750,000 devices monthly during FY20. This was aided by the funds raised by the company through IPO. The company also used these funds for the repayment of its debts and became a debt-free business in its debut year on ASX.
During the quarter ended 31st December 2020 (Q2 FY21), the company was consistently focused on placing the business for future growth. In addition, the company was mainly focused on the expansion of manufacturing capacity along with rising total unit production capacity in the Galileo and Pascal platforms. Galileo platform of the company increased its production capacity to 1.3 million units per month and 300k per month for Pascal devices by the end of Q2 FY21. The company recorded unaudited sales of around $2.0 million across the business during the quarter, and total revenue for 1H FY21 (unaudited) amounted to $4.5 million. AT1 recorded strong sales of the COVID-19 antibody test to around 400k. However, the company has not included Shipments to Access Bio of 259,200 units in the revenue as AT1 is seeking to book this shipment as revenue in Q3 FY21. The company reported cash receipts from customers of $2.8 million in the quarter, which brought the cash receipts for 1H FY21 to $5.8 million. It closed the quarter with a cash balance of $24.7 million and zero debt.
Looking forward, the company is focused on accelerating the supply of COVID-19 rapid antibody tests to Access Bio under the take-or-pay agreement and generating continued growth of COVID-19 antibody and antigen rapid test sales in the Australian market. In addition, AT1 is mainly focused on the expansion of global sales and continued development of its proprietary rapid test device technologies which simplify blood-based medical diagnostic testing processes and reduce errors against more complex conventional blood-based rapid diagnostic testing kits that require multiple accessories to run the test.
Cash Flow from Operating Activities (Source: Company Reports)
Strong Growth in Topline: During the year ended 30th June 2020 (FY20), the company recorded a rise of 895% to $5.37 million in revenue. Revenue in FY20 indicates a growth of ~10x and ~19x from FY19 and FY18, respectively. This growth was mainly underpinned by the acceleration of registrations and in-country rollout of HIV products by the Group’s HIV products distribution partners, and the growth of Other OEM business in Europe and US. In addition, gross profit for the year increased to $3.19 million from $0.10 million in FY19. As a result, the company recorded an increased gross margin from 18% to 60% as the business continued to scale up, and COVID-19 sales delivered higher margins.
Rising Sales Revenue (Source: Company Reports)
Decent Growth in Business Segments: The company’s activities during Q2 FY21 related to COVID-19 in North America, Europe, and Australia were extensive. With respect to the US, the company supported Access Bio in finalising its submission for Emergency Use Authorisation (EUA) for its antibody test on the Atomo platform from the US Food & Drug Administration (US FDA). In Australia, the company rolled out its TGA approved AtomoRapidTM COVID-19 antibody test for sale in the Australian market and managed to achieve sales of $394k across a range of professional testing and corporate channels. The HIV business of the company witnessed continued progress during the quarter supported by the validation of the Atomo facility in South Africa and a new Australian supply agreement entered with PrEP Health. With respect Original Equipment Manufacturing (OEM) business, the company increased its production of Pascal platform in response to rising demand, mainly from diagnostic company Lumos Diagnostics, which is commercialising its FebriDx rapid blood test.
Top 10 Shareholders: The top 10 shareholders together form around 71.34% of the total shareholding while the top 4 constitute the maximum holding. Dalraida Holdings Pty. Ltd. and Global Health Investment Fund I, LLC are holding a maximum stake in the company at 16.22% and 15.65%, respectively, as also highlighted in the chart below:
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Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group
Key Metrics: In the span of the past few years, the company witnessed improvement in its key margins (EBITDA, Operating and Net Margin). On the liquidity front, current ratio for the year stood at ~21.94x as compared to the industry median of 2.08x, which indicates that the company is well-placed to address its short-term obligation against the broader industry. Cash Cycle for the year stood at 247.4 days as compared to 1,707.2 days in FY19. On the leverage side, the company recorded nil debt to equity and a low asset to equity ratio of 1.05x as compared to the industry median of 1.58x. This indicates the deleveraged position of the business.
Profitability and Liquidity Profile (Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)
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: Looking forward, the company is focused on generating continued growth of COVID-19 antibody and antigen rapid test sales in the Australian market and increasing sales in the growing global health HIV market. For 2H FY21, the company plans to set up US business and dedicated resources for assisting increased focus on US market scale-up. The company has seen a commitment of $50 billion from the Biden Administration for testing across the US and indications. As a result, the company is expecting COVID-19 testing to be an important part of its business growth in years to come. In addition, 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-capitalized to deliver on its advised global strategy on the back of the growth of recurring revenues with established partners as well as proven responsiveness to emerging opportunities. The company is aiming to produce 1.7 million devices monthly by the end of FY21.
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: The company continue to support the OEM market, which includes meeting demand from Lumos for its FebriDx product and working on new OEM contractual opportunities. In the last one and three months, the stock of AT1 has corrected by 6.55% and 12.30%, respectively. As a result, the stock is trading towards its 52-week low level of $0.280, offering a decent opportunity for accumulation. Considering this, we have valued the stock using an EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in percentage terms). We have applied a slight premium to peer average P/E (NTM trading multiple) to arrive at our implied target multiple on the back of increased sales, strengthened cash position, debt-free balance sheet and encouraging outlook. On the technical analysis front, the stock has a support level of ~$0.27 and a resistance level of ~$0.33. Thus, considering the decent sales growth, cash-rich business, debt-free balance sheet, future opportunities, plans for US business, current trading levels and key risks associated with the business, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.285 per share as on 12th February 2021.
AT1 Daily Technical Chart (Source: Refinitiv, Thomson Reuters)
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