Nanosonics: Realigning the cost base

About the author:

Scott Power
Author name:
By Scott Power
Job title:
Senior Analyst
Date posted:
21 October 2021, 8:00 AM
Sectors Covered:
Healthcare, Life Sciences

  • We have realigned our cost base in line with management guidance. This has resulted in a downgraded to our short-term forecasts.
  • As a result our valuation and target price have been revised down to (login to view). Despite the profit revision, there is more than 15% upside to our target price and we have upgraded our recommendation to Add from Hold.
  • The targeted commercial launch of the flexible endoscope (CORIS®) in CY23 has created renewed investor interest in the name.

Event

In this note we have reviewed our cost base which is now more in-line with company guidance. At the FY21 results, NAN provided guidance of A$90m in operating cost.

We have provided some general comments around the flexible endoscope market, noting management’s comment that CORIS® is targeted to be launched in CY23 subject to regulatory approval.

Analysis

The increase in operating costs to A$90.0m is a big step up from the $70.8m incurred in FY21. The continued investment in R&D helps underpin the long-term growth prospects in the business. Our previous research note assumed a cost base of A$82.5m which was clearly below company guidance and needed adjustment.

The flexible endoscope market (and its product CORIS®) is the next major step for NAN. The company has highlighted five core areas of focus: 1) compliance and traceability (AuditPro™); 2) environmental decontamination; 3) storage solutions; 4) instrument cleaning; and 5) instrument disinfection (Trophon2 and CORIS®).

Forecast and valuation update

We have reduced our EPS forecasts by 30%/29%/23% for FY22/23/24 respectively.

In FY22 we have increased revenue by 4% as a result of increasing US unit growth by 15% to 20%, however the largest move comes from increasing our cost base forecast from A$82.5m to A$90.0m, in line with company guidance. This results in NPAT reducing from A$15.3m to A$10.8m.

We have made no changes to revenue for FY23/24, however the higher cost base results in an NPAT downgrade to A$19.0m (from A$26.9m) and to A$27.6m (from A$35.9m) in FY23/24 respectively. We note we have assumed a modest revenue contribution of A$8.3m from flexible endoscope sales staring in FY23.

We use a DCF based method to derive our valuation of (login to view). We have set the target price at the same level.

Investment view

We have upgraded our recommendation to Add from Hold.

Despite the lower valuation and target price there is still over 15% upside to our target price which provides the opportunity to upgrade the recommendation.

Price catalysts

AGM commentary around continuing installed base growth and an update on the clinical and regulatory progress for the CORIS®.

Risks

A further delay in commercial launch of CORIS® the flexible endoscope cleaning device.

Further slowdowns in installed base growth as a result of the COVID-19 situation.

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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.


Solid top-line outcome: BAP’s 1Q22 revenue was flat on the pcp, an extremely resilient result given the extent of lockdowns in the period (~70% of stores impacted) and the strength of the pcp (cycling 27% growth). Composition comprised: Trade +2%; NZ -10%; Retail -12%; and Specialist Wholesale +7%. Overall, BAP stated that non-lockdown areas are outperforming expectations. ▪ 1Q22 trade & retail: Trade/Burson revenue was up +2% on the pcp (LFL sales - 1%; cycling 8% pcp); NZ/BNT revenue was down -10% (LFL sales -15%; cycling +4%); and Retail/Autobarn revenue was down -12% (LFL sales -16%; cycling +36%). Within the Retail segment, online sales were +80% on the pcp. Stores percentages impacted by lockdown were: Trade 70%; NZ 100%; and Retail 50%. ▪ Specialist segment results: Specialist wholesale revenue is up 7% on pcp, with Auto electrical/Truckline divisions ‘performing strongly’; and WANO underperforming. ▪ GM pressure expected to be temporary: BAP stated GM was stable across Wholesale and NZ (45% of FY21 revenue); and down ~50bps Trade and Retail (~55% of FY21 revenue), driven by promotional and online pricing in lockdown areas (we assume no margin pressure witnessed in non-lockdown areas). BAP expect margins to revert once lockdowns ease. ▪ The cost base has increased vs pcp, a function of duplicated DC costs (commencement of new VIC DC), and higher group and team member support (covid related) costs. BAP noted FY22 store rollouts and refurbs are on track.

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