Company Overview: PolyNovo Limited (ASX: PNV) is a medical device company that designs, develops, and manufactures dermal regeneration solutions (NovoSorb BTM) using its patented technology. The company’s development program covers Breast Sling, Hernia, and other applications. The company uses its NovoSorb technology to treat burns, surgical wounds and negative pressure wound therapy.

PNV Details

PNV Rides on Geographical Expansion & Sufficient Capital: The company remains well equipped with Hernia repair device development and expects to bolster its foothold in the US market in years to come. The company also remains on track to invest cash flows in expanding its business strategies and research and development programs to commercialise its new products. In FY21, PNV has generated new account acquisitions, growth in sales, and greater geographical development.

Record US Sales & 2QFY22 (Oct & Nov) Performance Update:

• Managerial Changes: The company is in progress to appoint an additional 4 US sales representatives, with an approval of 10 sales reps immediately, bringing the total to 44 and the US team in whole to 54. Notably, the company has appointed Dan King as US Vice President Marketing and two new marketing positions to support its enhanced access in other uses of BTM. The company also established two additional field sales to augment its UK coverage in greater London.
• UK, Ireland & Europe Sales: Although the UK and Germany sales were up in Q1, however, in October and November, the UK/IRE and Europe underperformed the overall prospects. Nevertheless, the company is taking several programs to progress the efficacy of its in-market programmes and boost its direct salesforce and distributor network.
• US Sales: The US sales surged by 133% year over year in Q2, with November month being the strongest. Eleven new accounts were added during the period since 30 September 2021, bringing the total to 146 in October and November month.
• Australia & New Zealand Australia Sales: Despite a significant reduction in burn cases during the second quarter (Oct and Nov) compared to pcp, the company sales in Australia and New Zealand remained on track. Notably, over 40% of all BTM use is now outside of burns, making Australia a vital market in exploring the opportunities for new benefits of PNV’s technology.

A Quick Look at FY21 Key Highlights:

• Increase in Receipts from Customers: In FY21, the company has reported improved receipts from customers of $24.78 million, compared to $18.41 million on a pcp basis.
• A Turnaround in Operating Profit: In FY21, operating profit stood at $0.4 million, against a loss of $1.2 million reported in the year-ago period, owing to robust revenue growth, gross margin expansion, and cost management initiatives.
• Improvement in Bottom Line: In FY21, the company’s net profit after tax (excluding non-cash items) stood at $0.26 million, depicting an improvement of ~121% year over year, owing to the growth in commercial sales of NovoSorb® BTM locally and internationally.
• Increase in Top-line: For the year ended 30 June 2021, the company posted a growth of 32% in revenue to $29.3 million as compared to $22.2 million in FY20, driven by the benefit from higher sales of NovoSorb® BTM, which skyrocketed ~34% in FY21 from the previous corresponding period.

• Balance Sheet & Liquidity Position: The company’s cash position stood at $7.68 million as of 30 June 2021. At the end of the period, the company's total debt stood at ~$10 million. 

FY21 Key Snapshot; Analysis by Kalkine Group

Key Metrics: In FY21, the gross margin of the company stood at 94.7%, higher than the year-ago figure of 92.3%.  The cash cycle days in FY21 came in at 31.8, lower than the industry median of 126.1 days.

Profitability Profile; Analysis by Kalkine Group 

Top 10 Shareholders: The top 10 shareholders together form around 13.67% of the total shareholdings, while the top 4 constitutes the maximum holding. Williams (David John) is the entity holding maximum shares in the company at 2.86%. Lateral Innovations Pty. Ltd. is the second-largest shareholder, with a holding of 1.65%, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group  

Risk Analysis:  The company is exposed to significant risks arising from a surged market share of competitors, primarily affecting the operational growth of the business. Further, the company’s operations are highly susceptible to strict regulatory requirements and lockdown restrictions. Its operational health could be impacted by a failure in an ongoing trial and may prove a hurdle for its future growth.

Outlook: Following the successful DFU Trial (Chronic Wound Reimbursement) with ten patients, the second phase protocol of the trial is at the last stage of review. The company expects to initiate the next trial phase in early CY22. For FY22 and beyond, the company would focus on enhancing the intensity of worldwide sales and expanding its geographical footprint. The company has adequate capital to fund growth and remains on track to reinvest cash flow into the sales and R&D teams. Further, PNV’s investment in expanding the sales teams is expected to yield significant growth in sales and the rate of customer acquisition.

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 ~45.13% in the past six months. Currently, the stock is trading close to its 52-weeks’ low level of $1.35, indicating an accumulation opportunity. The stock of the company has been valued using the 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 premium compared to its peers, considering an enhanced focus on sales expansion, signing additional distributors, the establishment of recruitment sites in future, and geographical expansion plans, etc. For the purpose of valuation, peers such as ImpediMed Ltd (ASX: IPD), Imricor Medical Systems Inc (ASX: IMR), Nanosonics Ltd (ASX: NAN), and others have been considered. Taking into account the aforesaid fact, diversified portfolio, geographical expansion, decent top line growth, clinical trials, long-term outlook, current trading levels, indicative upside in valuation, and risk related to the impact of the Omicron variant along with volatility in the healthcare space, we recommend a “Speculative Buy” rating on the stock at the current market price of $1.485 as on 22 December 2021, 11:08 AM (GMT+10), Sydney, Eastern Australia.

PNV 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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