Compumedics Limited

CMP Details

FY20 Results Update: Compumedics Limited (ASX: CMP) is a medical device company involved in the development, manufacturing and commercialisation of diagnostic technologies for the sleep, brain and ultrasonic blood-flow monitoring applications. For the year ended 30 June 2020 of FY20, the company reported preliminary sales of around $35 million, down by 15% on the previous year, as a result of the lockdowns enforced on the customers globally due to Covid-19 pandemic. In China and the US, the company witnessed a decline of 43% and 11%, respectively in its revenues. Notably, in Japan, the revenue grew by 192% over the prior year, as its neurological distribution partner, Fukuda Denshi, continued to expand in this key market. In response to the Covid-19 situation, the company had taken various remedial actions in late March and early April. These actions are expected to generate an underlying positive EBITDA for FY20. In the first half of FY20, the company had reported revenue of $18.71 million and profit before interest, and tax of $1.17 million.

H1FY20 results (Source: Company Reports)

MEG and Somfit Update:  In February 2020, the US Food and Drug Administration (FDA) gave approval for the company’s Neuroscan Orion LifeSpan™ MEG, following installation at Barrow Neurological Institute in Arizona, USA. This has enabled the company to actively pursue additional near-term orders. Due to COVID-19 pandemic, the timing for decisions on most active opportunities has been delayed back by around six or more months.  With regards to its Somfit technology, the company is continuing with several field trials as part of its commercial activation pathway. It is worth noting that Somfit technology has the potential to be used as a vital signs monitor with application to COVID-19 patients.

Key Risk: The company is currently exposed to the risks and uncertainties related to COVID-19 pandemic. Further, the company’s activities expose it to a variety of financial risks including foreign currency risk, interest rate risk and price risk, credit risk and liquidity risk.

What to expect: The company had entered COVID-19 pandemic with a relatively strong and sound business base. Moving ahead, the company will continue to develop and implement contingency plans to manage the on-going impacts of COVID-19 pandemic containment measures. In the first weeks of FY21, the company has received good new sales orders. However, due to COVID-19 pandemic, the sales forecast remains problematic.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative) 

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

 Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of CMP has corrected by 37.41% in the past six months and is currently inclined towards its 52-week low price, offering a decent opportunity for accumulation. Through working capital management, immediate expense reductions and successfully obtaining Government assistance packages, the company has strengthened its balance sheet and has increased its cash on hand to $6.5 million from $3.3 million as on 31 December 2019.  We have valued the stock using an EV/Sales based illustrative relative valuation method and have arrived at a target price of low double-digit upside (in % terms). For the purpose, we have taken peers like Probiotec Ltd (ASX: PBP), Palla Pharma Ltd (ASX: PAL), Somnomed Ltd (ASX: SOM). Considering the company’s expected FY20 results, new sales orders in the first few weeks of FY21, robust balance sheet and current trading levels, we give a “Speculative Buy” recommendation on the stock at the current market price of $0.435 on 31 July 2020.

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

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