Nanosonics: Core business on track - new product some time away

About the author:

Author name:

By Scott Power

Job title:

Senior Analyst

Date posted:

24 August 2022, 7:00 AM

Sectors Covered:

Healthcare, Life Sciences

• Nanosonics (ASX:NAN) posted an in-line FY22 result, assisted by lower operating costs and a tax benefit.
• FY23 guidance results in modest downgrades to forecast, although little change to target price. Of most interest is the expected time to US launch of the CORIS® which will now take the de Novo path and in our view likely take a couple of years.
• The share price has reached our target and we move to a Hold (from Add) recommendation.

Event

NAN posted its FY22 results which were broadly in line with expectations and recent trading update. Revenue was A$120.3m (up 17% on pcp, and in line with guidance of A$120.3m) noting 1H A$60.6m/ 2H A$59.7m (MorgansF A$117.5m, Consensus A$119.3m).

Capital sales were A$37.7m (up 41% on pcp) reflecting recovery from COVID impact in FY21. Consumables revenue was up 8% to A$82.6m. Installed base was 29,850 units (up 12% or 3,100 units) reflected by US 2,650 units (+11%), Europe 1,820 units (+21%), AsiaPac 1,900 units (+8%).

EBIT was A$1.8m (Morgans -A$1.2m, Consensus -A$3.9m) and NPAT was A$3.7m (MorgansF -A$3.2m) which was better than expectations but largely driven by $2.1m tax benefit and lower operating costs. Net operating cash outflow was A$0.2m (pcp: A$5.9m), and NAN finished the year with cash reserves of A$94.5m (pcp: A$96.0m).

Gross margins for FY22 were down 1.6% to 76.4% (MorgansF 75%) due to increased freight costs and transition to direct sales model in North America.

NAN indicated the CORIS® flexible endoscope product has been accepted into the FDA safer technologies program (STeP) and will be subject to the de Novo clearance pathway.

We estimate this process will take over 2 years to complete. Management expects that an approval in Europe or Australia is potentially a quicker path and an estimated commercial launch in CY23 was called out

Analysis

The transition to direct sales model with GE Health is now complete, with NAN team responsible for 91% of new installed base and 86% of upgrades in 4Q. ▪ As part of the transition a build-up in inventory build was necessary, up 91% to A$22.6m and management commented this level is likely to remain over FY23 to ensure continuity of supply.

NAN continues to highlight the significant opportunity for upgrades from Trophon ERP to Trophon2 with approximately 9,000 units now at least 7 years of age (up from 6,500+ units as end of FY21). Management anticipates at least 1,000 upgrades in FY23 and beyond.

Management has provided FY23 guidance:

1. Revenue growth of 20-25% (A$144- 150m), this shows confidence in the US, although we remain disappointed with Europe’s growth rate.
2. Operating cost increase of 15-18% ($104-107m) - we were too low and have adjusted our forecasts.
3. Gross margins maintained around 75-76% (we assume 75%).

Forecast and valuation update

We have reduced our EBITDA forecast by 6%/4%/6% for FY23/24/25 respectively.

Given the changes to forecasts and after rolling forward the model, our DCF valuation has increased marginally to (login to view).

Investment view

NAN has reached our target price and as a result we have pulled our recommendation back to a Hold (from Add).

Price catalysts

• Further update on CORIS® program.
• Growing installed base and upgrades commentary likely at AGM in November.

Risks

• Delays in commercial launch of CORIS®, the flexible endoscope cleaning device.
• Slower sales traction with the direct sales model in the US.

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