Company Overview: Nanosonics Limited (ASX: NAN) is a leading provider of innovative solutions to prevent the transmission of life-alerting infections. The company is engaged in the manufacturing and distribution of the trophon® ultrasound probe disinfector. NAN is also involved in researching, developing, and commercialising infection control and decontamination products and related technologies.

NAN Details

NAN Rides on Decent Liquidity Position & Strong Product Adoption: Despite the continuing impacts of COVID-19, the company has witnessed a remarkable recovery in the underlying growth momentum of the business across trophon® adoption, which led to strong impetus in its installed base, capital revenue and consumables/service revenue.

Key Takeaways from 1HFY21 & Q2FY21 (Period Ending 31 December 2020):

• Robust Performance from Global Installed Base: In 1HFY21, global installed based increased 6% year over year and came in at 25,100 units. Markedly, in 2QFY21, the number of new units installed went up a whopping 38% on a quarter over quarter basis.
• Top-Line Details: 1HFY21 revenues declined by 11% on pcp, owing to purchases by GE Healthcare due to the COVID-19 outbreak along with the impact of a stronger Australian dollar. However, in 2QFY21, the group’s global revenue recovered strongly and went up ~48% from the previous quarter, primarily due to stronger installed base evolution across all regions, GE Healthcare recommencing purchases of capital equipment and higher consumables and service revenue.
• Rise in Consumables & Service Revenue: Although revenues from consumables and service went down 1% YoY in 1HFY21, it, showed a growth momentum in Q2FY21 and was up 29% on QoQ basis. The growth reflected the recovery in ultrasound procedure volumes, along with the growing installed base.

• Higher Investments: During 1HFY21, the company remained on track to invest higher in its growth strategy, which increased its overall operating expenses by 8% on a year over year basis.

• Details of Profit Before Tax: Operating profit before tax of went down from $6.7 million reported in 1HFY20 to $0.2 million in 1HFY21, owing to the impacts of COVID-19, and the ongoing investment in its growth strategy.
• Product Launch: Recently, the company launched a new infection prevention digital product platform, Nanosonics AuditPro™, in the United States. The latest launch will aid NAN to provide digital traceability, reporting and a fresh digital workflow compliance management system with prospective applicability across a wide array of medical instruments.

The ever-increasing international recognition through operations across the Asia Pacific and EMEA with trophon® plus new products determines new opportunities to expand the customer base. The below picture depicts NAN’s growing global installed base since 2017.

International Performance; Analysis by Kalkine Group

Balance Sheet & Liquidity Position: The company exited 1HFY21 with a cash balance amounting to $87.9 million. At the end of the period, the company's total debt was almost negligible and stood at $2.07 million (including lease obligations). The strong liquidity position provides the ongoing foundation for continued investment in growth strategies. In 1HFY21, free cash flow amounted to an outflow of $2.4 million due to the amount and timing of customer receipts and supplier payment delays.

Key Metrics: In 1HFY21, the gross margin of the company stood at 79.4%, higher than the year-ago figure of 75%. EBITDA margin for 1HFY21 stood at 7.7%, as compared to 7.3% of the industry median. Debt-to-equity ratio in 1HFY21 came in at 0.02x, lower than the industry median of 0.10x.

Profitability & Liquidity Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 38.86% of the total shareholdings, while the top 4 constitutes the maximum holding. Fidelity Management & Research Company LLC and Stang (Maurie) are holding a maximum stake in the company at 9.87% and 6.28%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis:

• COVID-19 Led Uncertainties: The company is exposed to risks associated with general global economic and market conditions.
• Stiff Competition:NAN operates in a highly competitive environment, subject to business consolidations, new strategic alliances, market pressures, and regulatory and legislative pressures.  
• Forex Headwinds:Any adverse movement in foreign exchange price may impact the financial performance of the company. 

Outlook: The company expects to recognise all revenue related to I-MED’s upgrade of its 200+ trophon®EPR fleet in 2HFY21. The company is expecting ongoing growth in total revenue and profitability in 2HFY21, driven by increasing installed base growth, continued growth in the trophon® eco-system, and increased consumables usage across all regions. Further, NAN remains confident regarding the overall improvement in hospital access, given the ongoing COVID-19 vaccination programs. The company remains on track to invest in the strategic growth priorities of the business via market development, R&D and infrastructure and capability growth. For FY21, total operating expenses are expected to be at the lower end of the $75-$78 million.

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 expects to report its FY21 results on 24 August 2021. The stock of the company has been corrected by ~24.11% in the past six months. Currently, the stock has a 52-week high and low level of $8.25 and $4.885, respectively. 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 compared to the peer’s average, considering fall in total revenues, risks related to COVID-19, increased costs and expenditure, foreign currency risk, strict regulatory approval, etc. For that purpose, we have considered peers such as Integral Diagnostics Ltd (ASX: IDX), Polynovo Ltd (ASX: PNV), and Resmed Inc (ASX: RMD). Considering the aforesaid fact, higher demand for trophon® eco-system, healthy balance sheet, growth in the global installed base, encouraging long-term outlook, current trading levels, valuation, and key risks associated with the business (as stated above), we recommend a “Buy” rating on the stock at the current market price of $5.470, as on 11 August 2021, 10:57 AM (GMT+10), Sydney, Eastern Australia.

NAN Daily Technical Chart, Data Source: REFINITIV 

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: 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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