Company Overview: Genetic Signatures Limited (ASX: GSS) is engaged in the expansion and commercialisation of its proprietary platform technology, 3base™. The company is also involved in designing and manufacturing a suite of real-time Polymerase Chain Reaction (PCR) based products to identify infectious diseases under the EasyScreen™ brand. The company presently operates in key markets mainly related to hospital and pathology laboratories undertaking contagious disease screening.

GSS Details

International Expansion & Strong Liquidity Position to Aid GSS: Genetic Signatures Limited (ASX: GSS) is a molecular diagnostics company, which mainly concentrates on the enhancement and commercialisation of its proprietary 3base™ platform technology. This technology aids the company to lessen the impact of genetic complexity of infection detection in molecular testing. Genetic Signatures limited remains on track to make massive progress on its expansion strategy, thereby tapping on the prospects led by the COVID-19 pandemic along with leveraging its internal abilities to deliver record growth.

The company reported an excellent first quarter of fiscal 2021 results, with revenue growing on a year over year basis along with positive cashflow. Results were positively impacted mainly due to the demand from its customers in the wake of the second wave of COVID-19 pandemic, especially in Victoria. Quarterly revenue came in at $10.5 million in 1QFY21, skyrocketing 585% year over year. The company witnessed strong demand for its SARS-CoV-2 Detection Kit in 1Q FY21. During the quarter, the company recorded a positive cashflow, adding $2.0 million in total and $3.4 million in net cash from operating activities. The company also witnessed good traction in EMEA, as the company’s US sales team is actively practicing COVID-19 prospects under the recent FDA Emergency Use Authorisation (EUA) advice. During this chaos and confusion, which is spread all over the world due to coronavirus outbreak, testing remains an important tool for securely re-starting economies. Notably, the company saw more than 70% increase in EMEA sales in 1QFY21 as compared to the previous quarter.

The company expects to see a positive decrease in the active cases all over the world, in the coming months, and look forward to performing a key role as governments urge people all over the globe to continue testing to curb the impact of coronavirus outbreak. Further, as winters are approaching in Europe and North America, the company expects respiratory pathogen tests to increase tremendously. Hence, the company stays well equipped to face any potential outbreaks during the flu season. It is worth noting that receipts from customers stood at $11.4 million in 1QFY21 and the company ended the quarter with cash balance of $33.2 million and no debt.

Coming to FY20, the company’s sales revenue went up 131% year over year and came in at $11.3 million. The growth was boosted by the rapid deployment and higher sales of the company’s SARS-CoV-2 Diagnostic Kit. The company remained strong enough to withstand the COVID-19 pandemic effect and raised a total of $37.5 million in October 2019 to support global expansion. The raised funds consisted of A$35m Placement to institutional and sophisticated investors across Australia and Asia and an oversubscribed A$2.5m share purchase plan (SPP) from existing shareholders. Additionally, the company also increased manufacturing capacity to deliver supplies to its customers across EMEA and APAC. The company also remains on track to strengthen its foothold in the domestic market, driving exceptional revenue growth, which is expected to continue in coming months.

Key Highlights From 2017-2020 (Source: Company Reports)

Geographical Contribution from Asia Pacific region: In the Asia Pacific region, revenues went up 116% and came in at $10.2 million. Revenue includes $0.7 million instrument sales. During FY20, GSS received TGA registration and unveiled EasyScreen™ SARS-CoV-2 Detection Kit across Australia, which is currently being used as a standalone test along with the broader EasyScreen™ Respiratory Pathogen Detection Kit by new and existing customers. The company also remains on track to meet current demand, along with implementation of more ongoing production expansion. In doing so, GSS lodged application with TGA for EasyScreen™ STI / Genital Pathogen Detection Kit.

Contribution from EMEA region: The European market remains a key focus area of the company through FY20 and beyond. In FY20, revenues from EMEA came in at $1.1 million, increasing a whopping 580% year over year, and including instrument sales of $0.3 million. The company took necessary measures to support the growing pipeline of opportunities in the region by appointing additional staff. During FY20, the company achieved European registration (CE-IVD) for the EasyScreen™ SARS-CoV-2 Detection Kit. The company also established new customer win, including three new European distributors.

Contribution from EMEA region: North America is the largest market opportunity worldwide, contributing ~42% of the global molecular diagnostics market. The company remains on track to pursue a direct sales approach with certified laboratories and expanded sales team with strong history in the industry. In FY20, revenues from America came in at $3K.

Geographical Highlights (Source: Company Reports)

Healthy Balance Sheet Position: The company exited FY20 with cash balance of 31.18 million, and total current assets amounted to $46.2 million. Total equity stood at $45.9 million as on 30 June 2020. Lease liabilities stood at ~$0.74 million, at the end of the period. Net cash outflow from operating activities came in at $9.49 million while net cash outflow from investing activities was at $2.35 million. The company’s business remains well capitalised to market through this uncertain period. Notably, GSS has received a R&D tax refund of A$2,578,627 in 2QFY21. The company remains on track to continue investing in key areas with robust cash balance, which provides the company with ample available liquidity for unforeseen events.

 Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 60.39% of the total shareholding. Asia Union Investments Pty. Ltd. is the entity holding maximum shares in the company at 26.25%. Perennial Value Management Ltd. is the second-largest shareholder, with a holding of 13.48%.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Metrics: In FY20, the company had a current ratio of 13.84x, higher than the industry median of 2.92x, representing a decent liquidity position. Debt to Equity ratio for the same time span stood at 0.02x, lower than the industry median of 0.06x. Gross Margins in FY20 stood at 56.9%, higher than the industry median of 48.5%. Over the past three years, the company is making efforts to improve its EBITDA margins, operating margins, and net margins. The company is optimistic about business growth, looking at the potential contribution from its 3base™ technology and lower debt levels.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Key Risks: The company’s financial instruments comprise mainly of receivables, payables, bank loans and overdrafts, finance leases, loans from related parties, cash, and short-term deposits. The main risks GSS is exposed to through its financial instruments are foreign currency risk, interest rate risk, liquidity risk and credit risk. Also, stiff competition from peers, COVID-19 related uncertainties and higher operating expenditure remains a potential concern.

Industry Outlook: The world economy is seeing a battle on all fronts amid the coronavirus-led global sales disturbance. However, health and medical services are witnessing growth at this moment. The Industry players in healthcare sector is poised to benefit from the evolving healthcare landscape, shift in global market, adoption of new and innovative business models, investing in new technologies, increase investments in personalized medicines and pursue external partners and collaborators for harmonising strengths. Enhanced focus on adopting and exchanging information exchange via use of health IT, improving overall patient outcomes and investment in developing and emerging markets are few positives of these healthcare companies.

 What to Expect: The company remains focused on securing long-term customer contracts with high amount of pathology groups, hospitals or government run programs. The company is also offering quality and secure customer service to build robust customer relationships. The company expects to witness growth in FY21 and beyond, underpinned by favourable unit economics. Also, increasing international recognition through the EasyScreen^TM SARS-CoV-2 release establishes new opportunities to enlarge the customer base. Further, the company’s capital raising program is likely to accelerate its commercialisation strategy and will aid the company to scale up for the increased demand from SARS-CoV-2 testing.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

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

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: In the time span of four years, GSS witnessed a compound annual growth rate of 59% in revenue. The stock is currently trading below the average of its 52-week’s high and low level of $2.94 and $0.900, respectively, proffering an opportunity for stock accumulation. The stock of the company went up 73.7% in the last one year. On a technical analysis front, the stock has a support level of ~$1.64 and a resistance level of ~$2.09. We have valued the stock using EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). For that purpose, we have considered peers such as ImpediMed Ltd (ASX: IPD), Medical Developments International Ltd (ASX: MVP), and SomnoMed Ltd (ASX: SOM), to a name few. Considering, the international expansion, higher demand for the new EasyScreen™ SARS-CoV-2 Detection kit and increasing sales to customers in Australia and Europe, increasing top-line in FY20 and 1QFY21, along with current trading levels, we recommend a “Buy” rating on the stock at the current market price of $1.735, down by 3.703% as on 9 December 2020. 

GSS Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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