Company Overview: Nanosonics Limited (ASX: NAN) is engaged in providing innovative solutions to prevent the transmission of potentially life-altering infections. It is involved in the production and distribution of the trophon® ultrasound probe disinfector. NAN is also involved in exploring, developing, and commercialising infection control and decontamination products and correlated technologies.

NAN Details

NAN Rides on Increase in Cash Reserves with Decent Long-Tern View: The company made decent progress in FY21, successfully adapting to the worldwide disputes led by COVID-19. As a result, the company achieved growth in  2HFY21, owing to market improvements and recorded a revenue growth of 39% year over year, backed by robust growth in the installed base and its trophon® technology.

Sneak Peek at FY21 Results (Period Ending 30 June 2021):

• Rise in Revenues: The company has generated revenue of $103.1 million in FY21, an increase of 3% over FY20, and in constant currency, the revenue grew by 12%, primarily due to stronger installed base evolution across all regions, GE Healthcare recommencing purchases of capital equipment and higher consumables and service revenue.
• Increase in Global Installed Base: In FY21, global installed base increased 13% year over year and came in at 26,750 units. Markedly, in 2HFY21, the number of new units installed went up by 20% on a year over year basis.
• Rise in Consumables & Service Revenue: Revenues from consumables and service increased 9% year over year and showed a growth momentum in 2HFY21 (up 27% on YoY basis). The growth reflected the recovery in ultrasound procedure volumes, along with the growing installed base.

• Increased Investments: During the period, the company remained on track to invest higher in its growth strategy, which increased its overall operating expenses by 12% on a year over year basis.
• Robust Trophon® Opportunity: In FY21, the company marked an increase in trophon® opportunity in North America, owing to the higher estimated Total Addressable Market, which improved from 40,000 units to up to 60,000 units, indicating development in the ultrasound market over the last eight years.

• Details of Profit Before Tax: Operating profit before tax went down from $12.4 million reported in FY20 to $11 million in FY21, owing to the impacts of COVID-19, and the ongoing investment in its growth strategy.
• Unveil of Digital Platform: The company unveiled a new digital product platform, Nanosonics AuditPro^TM, in June 2021 for traceability, reporting, and compliance purpose. Further, it is planning to launch the same product in other key markets throughout FY22.

Key Trends; Analysis by Kalkine Group

Balance Sheet & Liquidity Position:

• Increase in Cash Balance: The company exited FY21 with a cash balance amounting to $96.03 million, up from $91.78 million at the end of FY20. The company's total debt was almost negligible and stood at ~$2.49 million at the end of FY21.
• Decent Free Cash Flow: In FY21, free cash flow amounted to $5.9 million. 2HFY21, free cash flow amounted to $8.3 million, offsetting the net cash outflow of $2.4 million in 1HFY21.

Key Metrics: In FY21, gross margin of the company stood at 78%, higher than the year-ago figure of 75.5%.  The current ratio for FY21 stood at 7.28x, as compared to 2.85x of the industry median. The debt-to-equity ratio in FY21 came in at 0.02x, lower than the industry median of 0.06x.

Profitability & Liquidity Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 31.31% 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 9.57% and 6.28%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Key Risks:  

• The company is exposed to the risk of uncertainties associated with COVID-19 that would extend the timeline for adoption of trophon® by some customers and could lead to disruption in the global supply chain.
• Further, it relies on key distribution customer that accounts for around 60% of revenue. It operates in a highly competitive market and is prone to the risk of losing existing and new market share.
• Any adverse movement in foreign exchange price may impact the financial performance of the company.

Outlook: 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. Notably, a decent liquidity position will enable the company towards making continued investments in growth strategies. Considering the sustenance of positive market recovery trends, NAN is expecting to achieve double-digit growth in overall revenue in FY22. This will be supported by constant growth in installed base globally and higher usage of consumables across all regions. It expects a gross margin of over 75% in FY22. Further, it aims to achieve sustained acceleration in the trophon® installed base and associated ecosystem across all regions and growth in upgrades of trophon® EPR to trophon2 beyond FY22. For FY22, total operating expenses are expected to be ~$90 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 stock of the company has been corrected by ~13.99% in the past nine months. Currently, the stock has a 52-week high and low level of $8.25 and $4.885, respectively. 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 some premium compared to its peer average, considering the rise in total revenues, product launches, higher global installed base, decent liquidity position, sustained acceleration in the trophon® installed base, etc. For the purpose of valuation, peers such as PolyNovo Ltd (ASX: PNV), ResMed Inc (ASX: RMD), Fisher & Paykel Healthcare Corporation (ASX: FPH) have been considered. Considering the aforesaid fact, rise in top line, robust demand for trophon® eco-system, strong cash reserve, growth in the global installed base, decent long-term outlook, current trading levels, valuation, and key risks associated with the business, we recommend a “Speculative Buy” rating on the stock at the current market price of $6.4, down ~3.324% as on 15 September 2021.

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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