Company Overview: Atomo Diagnostics Limited (ASX: AT1) is engaged in the development and sales of medical devices. It designs devices for blood-based rapid testing for professional use, as well as for self-testing. The company's Rapid Diagnostic Test (RDT) devices help in the simplification of procedures, reduce common errors, and enhance the reliability of results.

AT1 Details

Expansion in the US Market and COVID-19 Surge Expected to Drive Growth Forward: Atomo Diagnostics Limited (ASX: AT1) develops and manufactures medical devices for professional users and untrained self-testers. The market capitalisation of the company as on 28 May 2021, stood at ~$96.66 million. As per a recent update, AT1 and Viatris Inc. have announced a multi-year agreement with health agency Unitaid to expand the access of HIV self-testing in low- and middle-income countries. The Mylan HIV Self-Test has been designed and manufactured by Atomo, and the test has been prequalified by the World Health Organisation (WHO). It helps in the detection of the presence or absence of HIV antibodies in a small blood sample. The agreement commits to make testing available in 135 eligible countries.

In Q3FY21, Unitaid and Viatris have executed an agreement with support from AT1 in the HIV business unit. During the same period, the first revenue was booked from Access Bio with FDA EUA pending for its rapid antibody test. AT1 received an initial order of 259,200 Atomo devices from Access Bio in Q2FY21, and the initial revenue for the same has been booked in Q3FY21. In the Australian COVID-19 business unit, there was a continuation in the COVID-19 rapid antibody test sales, and initial sales of COVID-19 rapid antigen tests were witnessed. Moreover, pilot programmes with aged care providers and sports organisations are expected to start soon. The cash receipts from customers in Q3 FY21 stood at $1.5 million, thus pushing the receipts for the YTD period to $7.3 million. The revenue was aided by repeated sales to Lumos, complementing the shipment to Access Bio. The company ended the quarter with a cash position of ~$21.4 million and no debt on the balance sheet.

Total Cash Trend (Source: Company Reports)

Progress in the US Market Expansion Strategy: AT1 has appointed consulting firm, Bondi Partners, to help it with the development and execution of its US go-to-market strategy. This engagement will revolve around the company’s strategic US market expansion strategy, identifying partnerships and build impactful relationships with the clients. After the successful business integration with two of the key customers of the company in the US, it is now focussed on the growth of its operations in the overall US market, which represents more than half of the POCT market value globally with a market valued pegged at ~US$8 billion.   

Continue to Leverage on Existing Platforms: The company has developed highly reliable rapid test platforms, which offer improved functionality for a broad range of clinical applications. It is committed to commercialising its range of RDT products on its existing platforms. In this regard, AT1 has progressed well with the commercialisation of eHealth solutions that provides results interpretation and traceability. The products in the pipeline include Neutralising COVID Antibody, Hepatitis C, liver disease, coeliac disease, to name a few.

Rapid Diagnostic Test Platforms (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders together form around 73.61% of the total shareholding, while the top 4 constitute the maximum holding. Kelly (John Michael) and LHGP Asset Management 18 Ltd are holding a maximum stake in the company at 17.99% and 15.92%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics: The company has reported an increase in the gross profit to 55.1% in H1FY21, compared to 42% in the previous corresponding period. Net margin improved to negative 55.7% in H1FY21, from a level of negative 241.1% in H1FY20. There has been considerable improvement in the liquidity of the company, with the current ratio at 16.39x in H1FY21, compared to 0.70x in the previous corresponding period.

Growth Profile and Profitability Metrics (Source: Analysis by Kalkine Group)

Key Risks: The company's line of business exposes it to a variety of financial risks, which include foreign currency risk, price risk, and interest rate risk. It undergoes certain transactions denominated in foreign currency, and this is prone to foreign exchange rate fluctuations. The Group is also exposed to credit risk, given that a counterparty might default on contractual obligations resulting in an adverse impact on the company’s profitability and earnings.

Outlook: Going forward, AT1’s key priorities will include to scale up the HIV business unit and expand the Viatris business under the Unitaid program, covering over 130 countries in the process. It will also look to address the market demand for COVID-19 related testing products, which might also give a push to the revenue in the medium term. The company seems to be progressing well on its US expansion strategy, and it will further look to secure new OEM contracts, including strategic partnerships with large diagnostic companies.

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

Source: 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 estimates the global private sector HIV Self-Test market to be around 7 million units in FY22. As per ASX, the stock of AT1 is trading below its average 52-weeks’ levels of $0.160-$0.455. The stock of AT1 gave a negative return of ~27.65% in the past three months and a negative return of ~2.85% in the past one week. 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 can trade at a slight premium to its peer median EV/Sales (NTM trading multiple), considering the increased traction of demand in company’s products due to the COVID-19 impact, strategic tie-ups and decent balance sheet to explore growth opportunities. For the purpose, we have taken peers such as SDI Ltd (ASX: SDI), Imricor Medical Systems Inc (ASX: IMR), ResMed Inc (ASX: RMD), to name a few, which comes under Health Care Equipment & Services. Considering the expected upside in valuation and current trading levels, progress on the US expansion strategy, multi-year agreement with health agency Unitaid to expand the access of HIV self-testing and the strong balance sheet of the company, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.170, as on May 28, 2021.

AT1 Daily Technical Chart, Data Source: REFINITIV

Note 2: Investment decisions 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 analysis has been achieved and subject to the factors discussed above alongside support levels provided.

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