Nanosonics Limited

NAN Details

Cancellation of Shares: Nanosonics Limited (ASX: NAN) is engaged in the manufacturing and distribution of disinfection products, consumables, and accessories. It undertakes R&D and commercialization of disinfection-related technologies such as trophon2, AuditPro^TM, etc. On 1 December 2021, NAN ceased 23,097 options and cancelled 16,543 performance rights due to the lapse of conditional right to shares.

Other updates

• On 23 November 2021, Selector Funds Management Limited became a substantial shareholder in NAN with ~5.11% voting power.
• On 1 December 2021, NAN issued 19,091 shares under an employee incentive scheme.

AGM Presentation Highlights:

• In 1HFY22, NAN plans to shift to a new head office in the Macquarie Park precinct to expand the R&D and manufacturing capacity, and operational support for the growing business.
• NAN is developing its next technology platform CORIS® for the cleaning of flexible endoscopes. Post-development completion, it plans to pursue regulatory submissions to commercially launch the technology in CY23.
• NAN recently launched AuditPro^TM (a new digital platform) in North America which reflects considerable opportunity with positive customer feedback and a growing pipeline. NAN plans to launch AuditPro^TM in multiple European markets, Australia, and New Zealand in early CY22.

Q1FY22 Update:

• Q1FY22 revenue is reported to be in sync with the internal budget, slightly up from Q3FY21 and signalling market recovery.
• The newly installed base in Q1FY22 increased by ~8% on Q3FY21.
• The company is experiencing traction in the upgrades with ~170 units upgraded in North America in Q1FY22 compared to ~60 units reported in Q3FY21.
• The sales of consumables to end-user customers also stood consistent with the budgeted numbers.

Key Financial Highlights; (Analysis by Kalkine Group)

Key Risks: The company faces the risk of regulatory changes, technological improvements, COVID-19 impact on hospital access, and limited procedures.

Outlook:

• The company plans to expand the commercialisation of trophon technology for ultrasound reprocessing while increasing its reach and liaison with the healthcare community and regulators.
• It plans to expand its geographical reach and currently focusing on growing in Europe & the Middle East. In Asia, it plans to grow particularly in Japan and China.
• As a third aspect of strategy, NAN aims product expansion via significant R&D investment in AuditPro ^TM and CORIS® technology platforms.
• NAN expects double digit revenue growth in FY22 due to increasing global installed base and consumables usage across regions.
• It expects gross profit margin to be in the 75% range (versus ~78% in FY21) and opex around $90 million in FY22.
• The company expects higher capital revenue from upgrades in FY22 versus FY21.

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 NAN gave a negative return of ~19.93% in the past three months and a positive return of ~1.90% in the past six months. The stock is currently trading lower than the 52-weeks’ average price level band of $4.885 - $8.250. The stock has been valued using the Enterprise Value to Sales 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 than its peers’ mean EV/Sales multiple, considering lower gross profit margin expected in FY22, lower cash flows in FY21, and continued plans to invest in R&D, product, and geographical expansion. For this purpose of valuation, few peers like ImpediMed Limited (ASX: IPD), Polynovo Limited (ASX: PNV), Resmed Inc (ASX: RMD), and others have been considered. Considering the current trading levels, recovery in ultrasound market and consumables, improved market conditions & growth in North America particularly, plans for product and geographical expansion, valuation, and associated key business risks, we give a ‘Speculative Buy’ rating on the stock at the current market price of $5.270, as of 2 December 2021, 10:45 AM (GMT+10), Sydney, Eastern Australia.

NAN Daily Technical Chart, Data Source: REFINITIV 

Sigma Healthcare Limited

SIG Details

Recent Key Updates: Sigma Healthcare Limited (ASX: SIG) is engaged in the pharmaceutical wholesale and distribution business to pharmacies in Australia. It runs over 1,200 branded and independent stores.

• Jeff Sells has been appointed as the Interim CFO with immediate effect as Ms. Jackie Pearson stepped down from the CFO position for the remaining portion of her notice period.
• In early November 2021, SIG turned down Australian Pharmaceutical Industries Limited (API)’s proposal to merge. The Board remains confident of its future growth and underpins continued investment in core operations and the finalisation of infrastructure upgrade plan to deliver greater shareholder value.

 1HFY22 Results Overview:

• In 1HFY22, SIG completely renewed the physical and IT infrastructure in alignment with its business strategy. The company incurred ~$17.8 million concerning the ERP costs in 1HFY22 versus ~$14.0 million in 1HFY21.
• SIG reported ~7% YoY growth in underlying EBITDA to ~$39.2 million in 1HFY22.
• The underlying operating costs were reduced by ~5.5% YoY in 1HFY22 to ~$130.2 million in 1HFY22.
• The revenue increased by ~5.5% YoY during the period due to an increase in sales and other revenue.

Assets & Liabilities Position; (Analysis by Kalkine Group)

Key Risks: The company faces the COVID-19 impact of extended periods of restrictions and lockdowns, changes in government regulations, and supply chain challenges.

Outlook:

• SIG now targets an underlying EBITDA growth of ~5% in FY22 due to the COVID-19 impacts instead of previously targeting 10% CAGR for underlying EBITDA for the next two (2) years. For FY23, SIG is aiming to achieve ~$95 - $100 million underlying EBITDA.
• It expects to incur ~$55 - $60 million capex in FY22 to complete the infrastructure and IT investment cycle.
• SIG focuses on achieving greater than 10% underlying ROIC at the end of FY22.
• The company expects the net debt to increase to ~$130 million in December 2021.
• The firm plans to optimise its cost base, leverage from continued investment in technology, drive organic and inorganic growth. Hence, it is in active discussions to pursue M&A opportunities for accelerated business expansion.

Valuation Methodology: P/E 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 SIG gave a negative return of ~14.51% in the past three months and a negative return of ~19.08% in the past six months. The stock is currently trading lower than the 52-weeks’ average price level band of $0.505 - $0.740. The stock has been valued using the Price to Earnings multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at some discount than its peers’ median P/E multiple, considering the expected increase in net debt, negative cash flows, continuing impact of COVID-19 lockdowns, and trend of negative ROE. For this purpose of valuation, few peers like Australian Pharmaceutical Industries Limited (ASX: API), Sonic Healthcare Limited (ASX: SHL), Integral Diagnostics Limited (ASX: IDX), and others have been considered. Considering the current trading levels, growth in the underlying business (revenue, NPAT, EBITDA) in 1HFY22, organic growth across its pharmacy brands and independent network, decent outlook, valuation, and associated key business risks, we give a ‘Speculative Buy’ rating on the stock at the current market price of $0.518, as of 2 December 2021, 10:45 AM (GMT+10), Sydney, Eastern Australia.

SIG Daily Technical Chart, Data Source: REFINITIV  

Medlab Clinical Limited

MDC Details

Conference Presentation Highlights: Medlab Clinical Limited (ASX: MDC) engages in the development of NanoCelle® (patented delivery platform), R&D of NanaBis™, and the continued use of NanaBis™ (under Australian Special Access Scheme) and other cannabis-related products. MDC, CEO, Dr. Sean Hall presented the following highlights at the recently held Jefferies London Healthcare Conference on 19 November 2021:

• MDC has a robust, commercially viable, patent-protected portfolio for NanoCelle® till 2036 from Europe, the US, Singapore, Canada, and other countries. It estimates the total addressable market for the NanoCelle® drug delivery platform is ~$260 billion.
• The NANOCBD™ drug candidate is still in the product development stage. As the next steps, MDC plans to strengthen the application for seeking drug approval from TGA. It is working with the existing partners to mutually develop and register for drug approval in 2024.
• MDC’s cannabis-related product portfolio addresses the unfulfilled need in areas of oncology and is transitioning to synthetic APIs as per the regulatory guidance.
• The Phase I/II study conducted on the bone cancer patients met the primary and secondary endpoints for the lead candidate NanaBis™.

Divestment of VMS Business Line: On 11 November 2021, MDC confirmed the sale of rights of its Australian branded nutraceutical business (VMS) to PharmaCare. However, MDC continues to own the R&D and reserves all its nutraceuticals rights for ROW (rest of the world) to pursue opportunities.

• MDC received ~$2.2 million as cash proceeds for the transfer of specific Medlab IP to PharmaCare. Further consideration payment is subject to a two-year earnout condition (the greater of $250,000 or 5% of net sales per year in the first two years)
• The deal is expected to generate ~$2 million savings in operating expenses every year and improve focus on key growth areas.
• After the sale completion and R&D grant, MDC held ~$13 million cash in the bank.

US Patent Granted: MDC recently announced the grant of the USA patent for NanoCelle® “Transmucosal and transdermal delivery systems” (Patent No. 11160753).

Q1FY22 (ended 30 September 2021) Results:

• MDC incurred ~$7 million expenditure on the R&D of NanaBis™ and other products. It spent ~$87,000 in patents and trademarks which provided for the issuance of NanoCelle® patent from the USA office.
• The updated results of the NanaBis™ Observational Study conducted exhibited continuous improvement in pain scores of ~155 patients (in AU) administered over a 6-and 12-month period.

In an updated document released on 11 November 2021, MDC reported an average cash burn of ~$1.2 million in Q1FY22. It expects to reduce the cash burn below ~$1 million from November onwards. 

Cash & Cash Equivalents Highlights; (Analysis by Kalkine Group)

Key Risks: The company faces the risk of commercialising lead drug candidates, clinical trial outcomes, and regulatory delays for approvals. It faces the COVID-19 uncertainty and adequate funding risk to conduct trials regularly.

Outlook:

• MDC is currently involved in the development of multiple drug registrations, commercialisation of its biotech assets, and pursuing partnering opportunities in the US/ Europe for early revenues.
• MDC plans to make available NanaBis™ for compassionate use in Australia and the UK (around January 2022) and ethical compassionate Use in EU4. It expects to submit the US FDA application for NanaBis™ in 2024.

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 MDC gave a negative return of ~11.76% in the past three months and a negative return of ~18.91% in the past six months. The stock is currently trading lower than the 52-weeks’ average price level band of $0.140 - $0.420. The stock has been valued using the Enterprise Value to Sales 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 than its peers’ median EV/Sales multiple, considering its continued net losses, negative ROE, and negative cash flows from operations, ongoing risk of COVID-19, and regulatory approvals. For this purpose of valuation, few peers like Adalta Limited (ASX: 1AD), Immutep Limited (ASX: IMM), Aroa Biosurgery Limited (ASX: ARX), and others have been considered. Considering the current trading levels, decent capitalisation, expected reduction in opex and lower cash burn, grant of US patent for NanoCelle®, valuation, and associated key business risks, we give a ‘Speculative Buy’ rating on the stock at the closing market price of $0.150, as of 2 December 2021.

MDC 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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