Company Overview: Nanosonics Limited (ASX: NAN) is engaged in providing innovative solutions to prevent the potential transmission of life-altering infections. The company is engaged in the production and distribution of the trophon® ultrasound probe disinfector. The company got listed on ASX in May 2007.

NAN Details

This report is the full version of the report published on 11 May 2022 at 3:00 PM GMT.

Continued Investments in Growth & Product Expansion Strategies Aids NAN: The company reported impressive 1HFY22 results compared with 1HFY21. Despite the rapid increase in infections and the related effects on shortage of hospital staff and procedure volumes, NAN continued the positive impetus, thanks to the growth in trophon® installed base and associated ecosystem across all regions, along with a change in EPR to trophon2 upgrades.

Investment Highlights; Analysis by Kalkine Group

Geographical Contributions:

• North America: In North America, the company reported revenue of $54.4 million in 1HFY22, depicting an increase of ~47% year over year and ~4% on 2HFY21. Capital revenues for the period reflected robust growth, owing to the ongoing rise in newly installed base and upgrade sales. In 1HFY22, NAN marked an increase in trophon® opportunity in North America, owing to the higher estimated Total Addressable Market (TAM). The North American installed base accounted for ~41% of the estimated TAM of 60,000 units, indicating development in the ultrasound market.

• Europe and the Middle East: Total revenues in Europe and the Middle East clocked at $3.4 million in 1HFY22, down 6% on pcp, mainly due to a reduction in capital revenue due to Delta and Omicron's impact variants on new installed base growth. Nevertheless, in 2HFY21, the company witnessed recovery in the newly installed base, with 79% of the 1H new installed base logged in the 2nd quarter.

• Asia Pacific: In Asia Pacific, the company reported revenues of $2.9 million in 1HFY22, signifying a rise of 11% on the corresponding prior period. Capital revenue in 1HFY22 stood at $0.9 million, increasing 29% on a pcp basis. Revenue from consumables and services went up 5% on the corresponding prior period in 1HFY22. The company remains on track to invest higher in operational infrastructure for Europe and Asia Pacific market expansion activities.

Financial Highlights; Analysis by Kalkine Group

Key Metrics: In 1HFY22, the EBITDA margin of the company stood at 10.3%, higher than the year-ago figure of 7.7%.  Debt-to-equity ratio for 1HFY22 stood at 0.04x, as compared to 0.13x of the industry median.

Profitability Profile; Analysis by Kalkine Group  

Key Update: Recently, the company informed the market that JPMorgan Chase & Co. and its affiliates, ceased to be a substantial holder of the company, effective from 4 May 2022.

Top 10 Shareholders: The top 10 shareholders together form around 48.76% of the total shareholdings, while the top 4 constitutes the maximum holding. Fidelity Management & Research Company LLC and Selector Funds Management Limited are holding a maximum stake in the company at 9.56% and 6.81%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Woes:  

Key Risks; Analysis by Kalkine Group  

Outlook: The revised sales model in North America is expected to impact revenues of 2HFY22 and beyond positively. Given the encouraging market recovery, particularly in North America and Europe, for new installed base growth and consumables usage, the company expects double-digit revenue growth in FY22. The ever-increasing international recognition through operations across the Asia Pacific and EMEA with trophon® plus new products determines innovative opportunities to expand the customer base. Given this positive, NAN expects a gross margin of over 75% in FY22. Additionally, the company focuses on achieving sustained acceleration in the trophon® installed base and associated ecosystem and growth in upgrades of trophon® EPR to trophon2 beyond FY22.

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 stock of the company has been corrected by ~20.6% in the past three months. The stock of NAN just recovered from its 52-week low price of $3.33. The stock has been valued using an EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight discount compared to its peers, considering the higher R&D expenditure, regulatory concerns, supply chain disruptions, etc. For the purpose of valuation, peers such as PolyNovo Ltd (ASX: PNV), Fisher & Paykel Healthcare Corporation (FPH), and others have been considered, which comes under healthcare sector. Considering the uptick in revenue and net profit in H1FY22, strong adoption of trophon® eco-system, increase in the cash balance, growth in the global installed base, decent long-term outlook, current trading levels, upside in valuation, and key risks associated with the business, we recommend a “Speculative Buy” rating on the stock at the current market price of $3.53, as of 11 May 2022, 10:30 AM (GMT+10), Sydney, Eastern Australia.

Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

NAN Daily Technical Chart, Data Source: REFINITIV 

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. 

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.

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