Company Overview: Genetic Signatures Limited (ASX: GSS) is a molecular diagnostics (MDx) company, which 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 & Robust Demand for EasyScreen™ Aids 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. The company remains on track to drive customer and shareholders’ value, through minimising work and maximising results, at the same time enhancing community health worldwide.

Recently, the company received CE-IVD registration for its 3base™ EasyScreen™ STI Genital Pathogen Detection Kit. CE-IVD permits the kit to be sold easily in the European Union and the UK. Expanding sales to customers across APAC, the UK and EU along with strong demand for the EasyScreen™ has underpinned the company’s strong financial performance.  This marks the 5^th 3base™ EasyScreen™ Detection Kit to achieve CE-IVD registration, contributing to the company’s achievement to execute its global expansion strategy. GSS remains on track to work on new products and improve current product offerings, while meeting the substantial demand for its EasyScreen™ SARS-CoV-2 Detection Kits.

The year 2020 was marked with excitement as GSS remained on track to curb the impact of COVID-19 led disruption and strengthen its position as a global supplier of molecular diagnostic tests. Notably, for the period ended 30 June 2020, the company recorded a total sales revenue of A$11.3 million, depicting an increase of 131% on a year over year basis. The increase in revenues aided the company to record a profit for 2HFY20, an important achievement for the company. The robust performance in FY20 has helped the company to gain investors’ confidence. During the period, the company’s total expenditure increased by 35% year over year, primarily due to the hiring of additional personnel to the teams in Europe, USA, and locally across all functions. 

Looking at the past year performance from 2017 to 2020, the company recorded a CAGR of 59%. The company is taking the necessary steps to bolster its position in North America, which is the largest diagnostics market globally.

Revenues From 2017-2020 (Source: Company Reports)

1HFY21 and 2QFY21 key Highlights: The company recently recorded a robust half yearly revenue of $18.7 million for the period ended 31 December 2020, which increased a whopping 638% from the prior corresponding period. Also, GSS posted an increase of 738% in revenues for the 2QFY21 quarter, which came in at $8.2 million. Instrument sales contributed $0.7 million to 2QFY21 revenue. The company witnessed strong demand for its SARS-CoV-2 Detection Kit during the period and took necessary measures to install multiple new instruments in 1HFY21, which in turn is expected to support future demand for tests. During the period, the company recorded a positive cashflow, adding $4.1 million in net cash from operating activities. Throughout the quarter, robust demand from customers in Australia remained on track. In 2QFY21, receipts from customers stood at $8.9 million. The company also secured a two-year supply deal with North American customer Boston Medical Center for EasyScreen^TM SARS-CoV-2 Detection Kit. It also obtained another supply agreement with California-based customer subsequent to the increased investment in sales and support.

The company exited the quarter with cash balance of $36.3 million and no debt. The company’s business remains well capitalised to market through this uncertain period. It is worth mentioning that GSS has received a R&D tax refund of $2.6 million in 2QFY21.

1QFY21 Key Highlights (Source: Company Reports) 

Geographical Expansion Remains a Key Catalysts: The company’s international sales during the quarter continued to grow and depicted a growing share of GSS’ revenues. Notably, total international sales accounted for 24% of total 2QFY21 revenue, depicting an increase from 16% in 1Q FY21. EMEA and North America contributed 19% of 1HFY21 revenue, reflecting higher investments made in sales and field teams, inventory, and warehouse facilities throughout 1H FY21. In Australia, the company witnessed higher demand from its domestic customers, due to the rapidly increasing demand for SARSCoV-2 testing volumes in response to the new outbreaks in NSW and Victoria. 

Half Yearly Revenue from Operations by Region (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders together form around 60.37% of the total shareholdings while the Top 4 constitutes the maximum holding. Asia Union Investments Pty. Ltd. and Perennial Value Management Ltd. are holding a maximum stake in the company at 26.25% and 13.48%, respectively, as also highlighted in the chart below: 

Healthy Balance Sheet with Decent Liquidity: In FY20, the company had a current ratio of 13.84x, higher than the industry median of 2.47x, representing a decent liquidity position. Debt to Equity ratio for the same time span stood at 0.02x, lower than the industry median of 0.09x. Gross margins in FY20 stood at 56.9%, higher than the industry median of 47.2%. The company reported $46.2 million of total current assets, with cash amounting to $31.18 million and trade and other receivables of $5.2 million at the end of FY20. Over the past three years, the company is making efforts to improve its EBITDA margins, operating margins, and net margins.

Profitability and Liquidity Profile (Source: Refinitiv, Thomson Reuters), Analysis by Kalkine Group  

Key Risks: The company is exposed to foreign currency risk, interest rate risk, liquidity risk and credit risk. Also, the increased costs and expenditure related to developing SARS-CoV-2 testing Kit using a costly technology and pipeline setbacks are few major headwinds. The company is exposed to shorter-term disruptions hindering from challenging macro-economic environment due to COVID-19 led outbreak. Further, GSS also faces stiff competition from peers, which adds to the woes.

Outlook: The company expects to see a positive decrease in the active cases all over the world, in the coming months, and aims to perform a key role as governments urge people all over the globe to continue testing to curb the impact of coronavirus outbreak. GSS has also taken additional measures to expand its international business, driving exceptional revenue growth, and creating a key milestone to enhance shareholder’s value, which is expected to continue in the coming months. GSS remains well positioned to accelerate global sales, increase its market share of the fast-developing molecular diagnostics market, and achieve additional regulatory approvals to supply EasyScreen™ SARS-CoV-2 Detection Kit to the USA and improve community health across the globe in FY21 and beyond. 

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 a market capitalisation of ~$268.60 million. Currently, the stock is trading below the average of its 52-week’s high and low level of $2.94 and $0.900, respectively, proffering an opportunity for share accumulation. The stock of the company has corrected by ~6.5% in the past one month. On a technical analysis front, the stock has a support level of ~$1.706 and a resistance level of ~$2.406. 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 % terms). We believe that the company might trade at a slight discount as compared to its peer median, considering its stringent regulatory approval, foreign currency risk, supply chain disruption and higher expenditure. 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 strong 1HFY21 and Q2FY21 performance, registration approval of its 3base™ EasyScreen™, augmented demand from SARS-CoV-2 testing Kit, decent liquidity position, and encouraging long-term outlook, we recommend a ‘Buy’ rating on the stock at the current market price of $1.86, down by ~1.064% as on 3 February 2021.

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

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