Company Overview: Atomo Diagnostics Limited (ASX: AT1) is engaged in the sale of medical devices. It has expertise in creating integrated rapid diagnostic test (RDT) platforms for blood-based testing. The company’s AtomoRapid devices have the ability to test and screen for a range of infectious diseases and chronic conditions. AT1 also provides OEM product development services to diagnostic companies worldwide.
AT1 Details
Surge in COVID-19 Related & HIV Cases Driving Product Demand: Atomo Diagnostics Limited (ASX: AT1) is involved in the development and sale of medical devices. The market capitalisation of the company as on 09 April 2021, stood at ~$135.40 million. The company has signed an agreement with PrEP Health Pty Limited to supply the Atomo HIV Self-Test to PrEP users in Australia through its online subscription service.
During H1FY21, the company reported robust financial performance with revenue growth of ~389% to $4.58 million, when compared to the previous corresponding period. The revenue growth was aided by COVID-related sales to NG Biotech & to the Australian market. The gross profit grew by ~278% to $2.52 million, with a simultaneous increase in gross margin by 1,300bps to ~55% during the period under consideration. There was also an improvement in the net operating cash outflow to $193,000. AT1 maintained a strong balance sheet with debt free status and ended the period with net cash of $24.7 million as of 31 December 2020.
H1FY21 Financial Performance (Source: Company Reports)
Increase in Top-Line Driven by Medical Needs: AT1 has reported an improvement in revenues over the past few quarters, driven by the impact of the COVID-19 pandemic and the demand for its user-friendly HIV testing products. It generated $2.61 million in revenues from the sale of COVID-19 antibody testing devices, and $0.77 million from HIV-related sales in H1FY21. It also delivered revenue of $1.11 million from the OEM business segment during the same period. There was an improvement in the gross margin performance from ~42% in H1FY20 to ~55% in H1FY21, aided by high margin contracts.
Rapid Growth in Sales (Source: Company Reports)
Increase in Demand for Products Amidst COVID-19: The company has witnessed a demand for its products with the surge in COVID-related cases. It has entered into a partnership with Access Bio to supply 2 million COVID-19 Antibody RDT devices into the US by 30 September 2021, with the first shipment of 259,000 units being delivered. AT1 has achieved commercial traction for the AtomoRapid Antibody test in the Australian market. It has made a sale of 1.9 million devices to NG Biotech as of 31 December 2020.
In order to address the market in the HIV segment, the company signed an agreement with PrEP Health for the distribution of Atomo HIV Self-Test in Australia. The device showcased excellent usability and consumers terming it as an easy-to-use product. The company announced that its South African HIV facility is fully operational following the receipt of certification from BSI, TGA and WHO.
Decent Balance Sheet Position: The company had a cash position of $24.69 million as of 31 December 2020, with the absence of debt in the balance sheet. It has stocked up its inventory while anticipating continued growth and demand in COVID-19 rapid test sales and HIV global tender opportunities. It has continued to focus on its product capabilities and made an investment of $2.29 million in R&D in H1FY21. AT1 plans to invest a further $0.65 million capital investment in PPE in order to scale up production capabilities and capacity.
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:
Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group
Key Metrics: The company delivered improved gross margin performance during H1FY21 at ~55.1%, compared to ~42% in the prior corresponding period. It also reported a significant improvement in the liquidity of the company to 16.39x during the first half of FY21, compared to 0.70x in the pcp. AT1 has also reported an improved trend in the net margin performance over the last few quarters.
Growth Profile and Profitability Metrics (Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)
Key Risks: The company is prone to several financial risks, which include currency risk, interest rate risk, credit risk, to name a few. Foreign currency risk may rise from commercial transactions with a foreign entity. It tries to mitigate the risk through sensitivity analysis and cash flow forecasting. Moreover, the Group has been experiencing increased traction for its products with the onset of the COVID-19 pandemic. However, in the post-COVID phase, it will remain a challenge for the company to sustain the same level of growth. In this regard, it has to look to diversify its revenue streams and invest in capacity.
Outlook: The company will look to continue on its growth momentum going forward. It will further look to ramp up the supply of Atomo devices to Access Bio and deliver sales beyond the contracted minimum 2 million tests. It will continue to focus on the growth of direct sales channels for COVD-19 antibody and antigen rapid testing in the Australian market, as well as seek new opportunities in international geographies. It also plans to support Mylan to scale up its HIV Self-Test business. AT1 plans to invest in the development of digitisation in order to support the use of Atomo products, primarily in home settings and via telehealth services.
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 has been investing in its in-house capability for assay development and commercialisation of new finished test products. As per ASX, the stock of AT1 is trading below its average 52-weeks’ levels of $0.230-$0.630. The stock of AT1 gave a negative return of ~4.08% in the past one month and a negative return of ~2.08% in the past one week. On a technical analysis front, the stock of AT1 has a support level of ~$0.229 and a resistance level of ~$0. 262. We have valued the stock using an EV/Sales multiple-based illustrative relative valuation and have arrived at a target price of low double-digit upside (in % terms). We believe that the company might trade at a slight premium to its peers median EV/Sales (NTM trading multiple), considering the decent top-line performance and expected benefits from R&D investment. For the purpose, we have taken peers such as Nanosonics Limited (ASX: NAN), Mach7 Technologies Limited (ASX: M7T), Cochlear Limited (ASX: COH), to name a few. Considering the expected upside in valuation, current trading levels, robust increase in top-line revenue, growing traction for the company’s products, net cash position and the key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.235, down by 2.084% as on April 09, 2021.
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AT1 Daily Technical Chart (Source: Refinitiv, Thomson Reuters)
Note: 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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