Company Overview: Genetic Signatures Limited (ASX: GSS) is involved in the commercialisation of its 3base™ proprietary platform technology. It is also engaged in manufacturing and designing a suite of real-time Polymerase Chain Reaction (PCR) based products to detect contagious 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

Expansion in the U.S Market and Generation of Profit 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. The company recorded an outstanding 1HFY21 sales, profit, and first supply deals with the US customers. Half yearly revenue stood at ~$18.7 million for the period ended 31 December 2020, which skyrocketed ~638% on a pcp basis. 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. 19% of the total 1HFY21 revenues came from European and the US customers, up from 4% recorded in the prior corresponding period. This depicts the company’s goal to build on the commercialisation strategy of expanding its international presence.

It is worth mentioning that the company reported its first significant profits of $4.49 million, as compared to a loss of $2.34 million reported in the year-ago period. Higher sales and improved gross margin (up 67% year over year) aided the results. 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 remained on track to made good progress during the period, the most important one of these was obtaining first sales in the USA. The company plans to recruit sales and support personnel in the USA and Europe in the coming 18 months, in order to leverage opportunities and support its customers.

Looking at the past performance over the period of FY17-FY20, the company reported a CAGR of ~78.1% in total revenues, with continuous upward progress. In 1HFY21, total revenues increased ~744% on a quarterly basis. The below trend has been strongly backed by robust demand for tests in 1HFY21, owing to the second wave of COVID-19 in Australia, Numerous new instruments installed throughout FY20 and FY21 along with positive cash flow from operations. The company is taking the necessary steps to bolster its position in North America, which is the largest diagnostics market globally.  

Revenues Trend (Source: Company Reports)

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. During these uncertainties, which is spread all over the world due to coronavirus outbreak, testing remains an important tool for securely re-starting economies.

Geographical Contribution from Asia Pacific Region: In the Asia Pacific region, revenues went up 519% and came in at $15.1 million. Revenue includes $0.2 million instrument sales. During 1HFY21, 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 an application with TGA for EasyScreen™ STI / Genital Pathogen Detection Kit.

Contribution from EMEA region: The European and UK market remains a key focus area of the company through 1HFY21 and beyond. EMEA contributed ~$2.96 million to revenue in 1HFY21, as compared to ~$0.09 million reported in the year-ago period. New supply agreements have been signed during December and January, which is expected to positively impact its top-line growth. The company took necessary measures to support the growing pipeline of opportunities in the region by appointing additional staff. The company also established new customer win, including three new European distributors.

Contribution from North 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 1HFY21, revenues from America came in at $0.6 million, depicting the first notable sales in the USA.

Geographical Contribution (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders together form around 62.67% 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: 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group 

Healthy Balance Sheet and Decent Liquidity: The company reported $52.5 million of total current assets, with cash amounting to $36.3 million and trade and other receivables of $4.9 million at the end of 1HFY21. Total lease liabilities amounted to $0.57 million. Net cash inflow from operating activities came in at $7.79 million while net cash outflow from investing activities was at $2.55 million. The company remains on track to continue investing in key areas with decent cash balance, which provides the company with ample available liquidity for unforeseen events.

The company is making efforts to improve its EBITDA margins, operating margins, and net margins. In 1HFY21, the company had a current ratio of 9.16x, higher than the industry median of 1.71x, representing a decent liquidity position. Debt to Equity ratio for the same time span stood at 0.01x, lower than the industry median of 0.07x.

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

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, and COVID-19 related uncertainties remains a potential concern. Further, increased costs and expenditure related to developing SARS-CoV-2 testing Kit using a costly technology and pipeline setbacks are few major headwinds.

Healthcare Industry Trends to Watch Out for: As the COVID-19 led activities lessens, the industry is expected to witness some restoration of demand in 2021. Healthcare companies are being more optimistic regarding the patient volumes and earnings results, as more and more vaccines hit the market. Further, the relief funds provided to the healthcare companies are aimed at relieving healthcare participants from the loss incurred due to COVID-19 business disruption, thereby allowing it to remain stable and focused on the patient needs. The healthcare companies are focusing more on cost-saving measures, thus contributing to the margin growth, since the top lines were previously worried due to the virus impact. Players in the industry executed cost-reduction programs, postponed dividend and share repurchases programs, decreased planned projects and also reduced projected capital expenses.

Managerial Changes: On 6 April 2021, the company appointed Dr Neil Gunn to the Board of Directors. Previously, Dr Gunn was working as a President of a Business Unit of Roche Diagnostics. Mr. Neil brings around 30 years of experience and leadership in the medical device and diagnostics industry to GSS’s Board of Directors. We believe that Gunn’s appointment will further enhance the quality of the professional team that has helped GSS to achieve and maintain a solid reputation of providing high-quality and regulatory processes, strategy development and commercial operations.

Future Expectations: The company remains focused on securing long-term customer contracts with high quantity 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, decent liquidity position is likely to accelerate its commercialisation strategy and will aid the company to scale up for the increased demand from SARS-CoV-2 testing.  Further, the company’s FDA submission for the EasyScreen™ Enteric Protozoan Detection Kit, and TGA registration for EasyScreen™ STI / Genital Pathogen Detection Kits are few other positives, going forward.

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: Currently, the stock is trading below the average of its 52-week’s high and low level of $2.94 and $1.535, respectively, proffering an opportunity for share accumulation. The stock of the company has corrected by ~3.1% in the past one month. On a technical analysis front, the stock has a support level of ~$1.428 and a resistance level of ~$1.852. 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 supply chain disruption risk, increased costs and expenditure associated with developing SARS-CoV-2 testing Kit, foreign currency Risk and strict regulatory approval, etc. 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 name a few. Considering strong 1HFY21 performance, recording first time profit in 1HFY21, FDA submission for the EasyScreen™ Enteric Protozoan Detection Kit, higher 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 $1.55, down by ~1.274% as on 7 April 2021.

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

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