Nanosonics: Transition to direct sales model going well

About the author:

Scott Power
Author name:
By Scott Power
Job title:
Senior Analyst
Date posted:
26 May 2022, 9:30 AM
Sectors Covered:
Healthcare, Life Sciences

  • The transition to a direct sales model with GE is progressing on track and on time, with completion expected by end FY22.
  • Nanosonics (ASX:NAN) provided a solid trading update with 3Q sales and installed base growing in line with 2Q, the company noted it anticipates FY22 revenue will be in line with consensus.
  • Feedback from a site visit to Indianapolis and meeting with the management team suggests a high level of excitement around moving to a direct sales model.
  • We have made no changes to our forecasts and valuation. We maintain our Add recommendation with a (login to view) target price.

Business update on transition to direct sales model

NAN has provided a business update on the transition to a direct sales model with GE Health. The transition of customer accounts has started and is on track for completion by end-June 2022. NAN noted its Indianapolis warehousing and logistics operation has sufficient capacity to fulfill demand.

NAN continues to build its sales and clinical applications team to support the transition, with 9 out of an anticipated 15 positions already started. This includes several staff members from the GE disinfection team who joined NAN during the quarter.

No indication of a new capital reseller agreement with GE was made, noting the existing agreement is set to expire in June 2022.

3Q trading update and feedback from Indianapolis site visit

3Q consumables and service revenue represents ~80% of sales in the US. For the quarter NAN added 740 units, with total global installed base now totaling 28,900. Upgrades for the quarter and monthly run-rate of sales and consumables continues to grow in line with 2Q.

NAN noted FY22 total revenue is anticipated to be inline with consensus (A$115.5m). 

Interestingly, no news on the CORIS® product development and timelines was mentioned in the update. We await further news on this front with the last timing update at the FY21 results call, suggesting first sales in CY23. Given the lack of clarity, we hold some uncertainty around whether this timeline remains.

We have spoken with colleagues who recently visited the Indianapolis site and met with the President of Americas, Director of Service Operations and Senior VP of Customer Loyalty and Success.

They reported that operationally the warehouse is functioning efficiently and the management team is excited about moving forward under a direct to customer model.

Forecast and valuation update

We have made no changes to our forecasts, noting our revenue forecasts are in line with consensus estimates for FY22. In FY23/FY24, we sit above consensus given we maintain a revenue contribution from the new flexible endoscope product.

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

Investment view

We maintain our Add recommendation for investors with a higher risk profile, noting recent share price weakness has created a ~43% TSR on offer for shareholders.

Price catalysts

Confirmation of finalisation of GE Health arrangements in July 2022.

Updates on clinical and regulatory progress for CORIS®.

Risks

Delays in commercial launch of CORIS®, the flexible endoscope cleaning device.

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

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