Nanosonics Limited. Australia Health Care Equipment & Supplies. Growth outlook unchanged. Earnings Forecasts. Source Company, LINWAR Research

Transcription

1 LINWAR Securities 30 August 2011 Nanosonics Limited Australia Health Care Equipment & Supplies Outperform (Unchanged) Price: Target Price: Stock's expected return (12mth) $0.57 $1.20 Capital growth 112.4% Dividend yield 0.0% Total return 112.4% Required market rate of return * 11.3% Expected excess return 101.1% * Defined as 6.25% risk-free rate plus 5% ERP Relative price performance Growth outlook unchanged Following NAN reporting its FY11 result yesterday we maintain our Outperform recommendation and price target of $1.20. The company reported revenues below our forecast, however, in our view this is a timing issue and is of little consequence as demand for the Trophon device remains strong. The company finished the year with cash of $12.4m. Cash burn in 2H11 remained at ~$700k per month. We expect this should moderate as revenues begin to accelerate in FY12. NAN is the process of identifying new, larger production facilities in Sydney. In the meantime additional accommodation at the current site is available at minimal cost and capital investment. The annual production capability is therefore ~4,000 units which is approximately double our forecast unit sales in FY12. The company remains adequately capitalised to fund its activities into the medium term. We expect GE Healthcare will continue to assist with timely payment of invoices and this will help keep working capital growth lower. Company data ASX code NAN Market capitalisation ($Am) $130.2 No. of shares (m) Volume (12 mth daily avg) 259, mth price range $ $0.99 Earnings adjustments 2012f 2013f 2014f Previous NPAT ($m) Change in NPAT nm -65.4% 12.7% Previous EPS (cps) Change in EPS nm -65.2% 13.4% Market consensus Revenue ($m) EBIT ($m) NPAT ($m) Based on data provided from previous announcements, we estimate the initial order from GE Healthcare was for approximately 400 Trophon units. We estimate the majority of revenues from these sales will fall into FY12 along with the growing annuity stream from consumables sales. Changes to FY12 revenues are minor. We have increased expenses to annualize for the 2H11 run rate, hence the changes to earnings. Earnings Forecasts Year end June f 2013f 2014f NPAT (Reported) ($m) NPAT (Normalised) ($m) Diluted EPS ( ps) EPS growth (%) 13.3% -27.7% 45.3% 162.5% 351.9% PE ratio (x) Dividend per share ( ps) Dividend Yield (%) 0.0% 0.0% 0.0% 0.0% 6.7% EV / EBITDA (x) Book Value ( ps) P / BV (x) John Hester john.hester@linwar.com.au L I N W A R R E S E A R C H

2 Result Summary NAN reported its full year result yesterday which we summarise as follows: Table 1: Result summary Actual Actual Forecast Item ($million) % Chg 2011 % Chg Sales nm 5.2 nm EBITDA nm -8.5 nm EBIT nm -8.6 nm Reported NPAT nm -6.0 nm Reported EPS nm -2.6 nm Dividend DPS - - n/a - n/a GE Health Care remain a strong supporter of NAN Revenues were beneath our forecast, however, in our view this is a timing matter. Our mid and long term outlooks for revenue growth remain unchanged. The company released its annual report yesterday and we summarise some of the highlights as they relate to the outlook: Gross margin was 56% on sales of only several hundred units. Margin is likely to expand; NAN has opened support offices in Indianapolis, USA and Hamburg Germany; The consumables product has been labelled Sonex-HL with manufacturers appointed in Australia, USA and Europe. The US manufacturer is Applied Laboratories Inc, also in Indiana, and of course it carries all the relevant FDA approvals for manufacture of the consumable cartridge. The company confirms that the Trophon remains the only device capable of high level disinfection for ultrasound probes. North America remains the largest single market for the Trophon and by all accounts NAN s partner, GE Healthcare, remain very strong supporters of the company, so much so that they are quoted in NAN s annual report. Compared to existing disinfection processes, the Trophon EPR offers a safer, faster and more convenient solution for high level disinfection GE has over 170,000 customer sites. In our view a portion of these may require more than 1 Trophon hence the opportunity for the Trophon is undiminished from previous estimates. In addition each of the very large ultrasound manufacturers in North America has access to the Trophon via GE. Further to this testimony from GE, we have spoken to local users of the device independently of NAN and have received similar feedback. The Trophon is delivering on its promises. Local sales are set to expand. The company is in the process of scaling up production capacity within its existing facilities and in planning for new production facilities. After allowing for consumables sales and costs equal to the 2H11 annualised run rate, we estimate NAN will break even in 2H12 or in FY13. 2 L I N W A R R E S E A R C H

3 NAN is in the process of identifying new premises in Sydney for relocation sometime in late FY12 or FY13. We have included capex for this move in FY13. LINWAR forecasts a total of ~2,000 unit sales in FY12, well within the estimated current capacity of 4,000 units. New applications for the technology remain on track. NAN has built and successfully tested a number of prototype devices for other market opportunities. In our view these are likely to be for cardiac probes and endoscopy which we consider to be the lowest hanging fruit, and both very large markets. We have not included revenue estimates from these devices at this time. The management team is settled with Dr Ron Weinberger, a co-inventor of the Trophon continuing as the Chief Executive. In addition the executive team has been expanded in the US with sales executives and service team. Balance Sheet and Cash 2H11 cash burn from operations was $4.4m or $737K per month. GE is cognisant of NAN s emerging status and pay invoices on very short terms less than a week is our understanding. Consequently investment in working capital as the company expands should be kept under control. Despite GE consideration in prompt payment of invoices, NAN will shortly have two version of the Trophon under production, one for North America and one for ROW. The only significant difference is the power supply. This will require increased investment in inventory, hence our expectation of increased cash requirements. Cash at year end was $12.4m. In our view the rate of cash burn is likely to ease in the coming months as cash inflows increase, but the board is likely to be conservative in assessing the company s cash needs. Earnings Amendments Revenue estimates remain largely unchanged. We have amended other operating costs to maintain the 2H11 annualised run rate. Valuation We maintain our target price at $1.20 which is based on our firm based DCF. 3 L I N W A R R E S E A R C H

4 Table 2: DCF Valuation Firm Value $million Total PV of Explicit Free Cashflow 72.1 Total PV of Continuing Year Enterprise Value Less Net Debt 0.0 Equity Value Number of Shares (million) Equity Value Per Share $1.13 Dividends prior to valuation base date yet to be received $0.00 Net cashflow valuation per share incl cum dividends $1.13 Franking Credits per share (valued at 33 in the $) $0.07 Total Value Per Share $ L I N W A R R E S E A R C H

5 Nanosonics Limited Outperform Profit & Loss Per share data Year end June ($m) f 2013f 2014f Year end June f 2013f 2014f Sales Revenue Reported EPS EBITDA Normalised EPS Depreciation Normalised Growth -13.3% 27.7% -45.3% % 352% EBITA Ordinary DPS Amortisation Franking 0% 0% 0% 0% 100% EBIT Payout Ratio 0.0% 0.0% 0.0% 0.0% 50.0% Net Interest Expense FCF per share Pre-Tax Profit NTA per share Tax EFPOWA OEI NPAT Segmental Analysis Net Abnormals Year end June ($m) f 2013f 2014f NPAT Reported Revenue Normalised Earnings Trophon Unit sales ,850 3,050 4,215 Margins on Operating Revenue Cumulative unit sales ,462 5,512 9,727 EBITDA -1073% -532% -28.2% 13.8% 33.9% EBIT -1174% -577% -34.2% 10.0% 31.0% EBIT NPAT -1071% -499% -32.7% 10.9% 31.5% Trophon Change on pcp Revenue 146.9% 194.5% 747.4% 87.8% 55.9% EBITDA -14.1% 46.1% -55.0% % 281.8% NPAT -6.6% 37.2% -44.5% % 351.9% Balance Sheet Year end June ($m) f 2013f 2014f Cash Receivables Inventories Other Current Assets PPE Intangibles Other Cash Flow Non-Current Assets Year end June ($m) f 2013f 2014f Payables Gross cashflow Interest bearing liabilities Net Interest Other Tax paid Current Liabilities Other Net operating cash flows Interest bearing liabilities Other Payments for PPE Non-Current Liabilities Payments for acquisitions Other Net Assets Net investing cash flows Contributed equity Net share issues Retained Profits Net borrowings Other Dividends paid Total Equity Net financing cash flows Balance Sheet Analysis Change in cash held Year end June f 2013f 2014f Cash at beginning of period Other Interest cover n/a n/a n/a n/a n/a Cash at end of period Gearing (ND/ND+E) Net Cash Net Cash Net Cash Net Cash Net Cash Free Cash Flow Net Profit Margin -1071% -499% -32.7% 10.9% 31.5% Year end June ($m) f 2013f 2014f Asset Turnover EBITDA Return on Assets -32.8% -66.6% -50.7% 21.7% 60.9% Less: Net Interest Financial Leverage Less: Tax paid Return on Equity -34.7% -78.2% -76.6% 32.4% 84.5% Less: Capex on PP&E Less: Change in WC Return on Inv. Capital % % % 48.2% 162.6% Free Cash Flow Return On Invested Capital = Taxed EBIT / ND + SHF 5 L I N W A R R E S E A R C H

6 Nanosonics Limited Outperform Statistics & Valuation Valuation Ratios at $0.57 Year end June f 2013f 2014f Date 29-Aug-11 PE Ratio Share price $ 0.57 EV/EBITDA DCF Valuation $ 1.19 EV/EBIT Price/FCF na na na na 8.4 Target price $ 1.20 Yield (%) 0.0% 0.0% 0.0% 0.0% 6.7% Premium/(discount) to share price 112.4% Total Return (including dividend yield) 112.4% Valuation Ratios at Target Price of $1.20 Year end June f 2013f 2014f No. of shares (M) Market capitalisation ($M) PE Ratio Index S&P/ASX100 EV/EBITDA Yield (%) 0.0% 0.0% 0.0% 0.0% 3.2% DCF Assumptions Peer Valuations - PE ratio f 2013f 2014f Risk-free rate 6.25% Equity market risk premium 5.00% Beta 1.50 Cost of Equity 13.75% Assumed Gearing (D/D+E) 20.00% WACC 12.12% Major Shareholders Peer Valuations - EV/EBITDA Shares Holding f 2013f 2014f M % Maurie Stang % Bernard Stang % Stepen Kritzler % Kinetic % Wilson HTM % Management Shareholders Porter Analysis Shares Holding v. Strong Strong Avg Weak v. Weak M % Threat of: Ron Weinberger % Suppliers Buyers New entrants Substitutes Industry Competition Current Earnings Guidance from Management Porter score (ascending scale of 1-25) 20 No Guidance Commentary: S upplie rs - NAN has no competitor in the space Buyers - healthcare providers New Entrants - none on the short term horizon Substitutes - have a number of important limitations Industry Comp - not significant This report was prepared by LINWAR Securities Pty Limited (LINWAR) ABN , Level 23, 68 Pitt Street, Sydney NSW LINWAR is a Licensed Dealer in Securities, AFSL To the extent that the distribution in Australia of this report constitutes securities advice, that advice is given by LINWAR. If you would like to discuss this report, please contact the authors mentioned on the front page of this report. The names of the authors of any foreign research reports appear as a matter of record only and the authors are not employed by, or acting for or by arrangement with, LINWAR. DISCLAIMER: The information and opinions contained in this report have been obtained from sources believed to be reliable, but no representation or warranty, express or implied, is made that such information is accurate or complete and it should not be relied upon as such. Information and opinions contained in the report are published for the assistance of recipients, but are not to be relied upon as authoritative or taken in substitution for the exercise of judgement by any recipient, and are subject to change without notice. This report is not, and should not be construed as, an offer document or an offer or solicitation to buy or sell any investments. Except to the extent that liability cannot be excluded, LINWAR does not accept any liability for any direct or consequential loss arising from any material contained in this report. DISCLOSURE: The author and/or associated parties may effect or have effected a transaction for their own account in the investments referred in this report. On the date of this report such parties may hold a position in any of the investments mentioned in this report and may purchase and/or sell the investments at any time in the open market or otherwise, in each case either as principal or as agent. WARNING: This report is intended to provide general securities advice, and does not purport to make any recommendation that any securities transaction is appropriate for any recipient's particular investment objectives, financial situation or particular needs. Prior to making any investment decision, recipients should assess or seek advice from their advisers on whether any relevant part of this report is appropriate to their individual circumstances. This report may not be reproduced, distributed or published for any purpose without prior approval from the author. US AND UK CLIENTS: This report is prepared for professional investors and is not intended for Private Customers in the United Kingdom as defined in FSA rules and should not be passed on to any such persons. For purposes of distribution in the United States, this report is prepared for persons who can be defined as Major Institutional Investors under US regulations. Any US person receiving this report and wishing to effect a transaction in any security discussed herein, must do so through a US registered broker or dealer. 6 L I N W A R R E S E A R C H

7 Research Stuart Turner Head of Research Engineering Contractors Richard George Senior Analyst Property/Retirement John Hester Senior Analyst Healthcare George Kopsiaftis Senior Analyst Media/Online Mark Wade Analyst Specialty Retail/Agriculture Owen Humphries Analyst IT Services Tim Daly Data Co-ordinator Corporate Finance Research Sales John Bowie Wilson Chairman Greg Glanville Director Richard Moulder Institutional Sales Simon Villata Institutional Sales Sales Trading Anthony Wilson Sales Trading Peter Tebbutt Sales Trading Administration Chris Harris Director Lisa Emilianoff Administration Assistant Ross Lewin Director Mark Baker Director David Bert Manager L I N W A R R E S E A R C H