Nanosonics (NAN) Summary of 2Q17 Cash Flows SOURCE: BELL POTTER SECURITIES ESTIMATES

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1 16 January 2017 Analyst John Hester Authorisation TS Lim Nanosonics (NAN) US Market Continues To Expand Recommendation Hold (unchanged) Price $3.16 Target (12 months) $3.28 (previously $3.23) Expected Return Capital growth 3.8% Dividend yield 0% Total expected return 3.8% Company Data & Ratios Enterprise value Market cap $887.2m $940.8m Issued capital 297.7m Free float 85% Avg. daily val. (52wk) $2.5m 12 month price range $ $3.60 GICS sector Healthcare Equipment and Services Price Performance (1m) (3m) (12m) Price (A$) Absolute (%) Rel market (%) Summary of 2Q17 Cash Flows Highlights included 2Q17 revenue of $18.3m which was 4.5% ahead of our forecast. Revenues for the 6 month period ended 31 December 2016 were $36.1m. The company generated $3.0m in net cash from operations during the quarter and is consistently cash flow positive, hence this was the final quarterly cash flow update. On a regional basis, the US market continues to dominate with the installed base growing by just over 1,000 units in the quarter. There are now more than 10,700 Trophon units installed in the USA compared with 12,700 globally. Outside of the US we expect the next largest market (in terms of installs) is Australia, followed by the UK, hence there remains a vast opportunity for growth in the UK market. While the roll out of Trophon in the US continues at a good pace (i.e. 1,000 units per quarter), the medium term challenge for NAN will to continue to grow the top line at considerably higher than 10%. The market has priced in aggressive top line growth for NAN and we are cognisant of the fast approaching period whereby if US sales continue at the same pace and there is insignificant growth in other markets, then revenue growth rate may begin to appear modest. The opportunities for top line growth remain numerous. The European market remains vastly underpenetrated while new markets in Japan, India and throughout Asia remain completely untapped. In addition the company continues to expand its R&D spend including the development of new products and potentially the next generation of the Trophon. Nevertheless we do not expect any major announcements during the course of calendar 2017 and in the absence of a major catalyst, we maintain our hold recommendation. Maintain Hold Recommendation and Price Target There are no significant changes to earnings and we maintain our hold recommendation. Price target is amended to $3.28 from $3.23. Absolute Price $4.00 $3.00 $2.00 $1.00 $0.00 SOURCE: IRESS Jan Apr Jul Oct Jan Apr Jul Oct NAN S&P 300 Rebased Earnings Forecast June Year End FY16 FY17e FY18e FY19e Revenues EBITDA $m NPAT (underlying) $m NPAT (reported) $m EPS underlying (cps) EPS growth % 103% Large 59% 8% PER (x) 5, FCF yield (%) -0.4% 0.9% 2.4% 4.5% EV/EBITDA (x) 1, Dividend (cps) Dividend yield 0% 0% 1% 0.6% Franking 0% 0% 0% 0% ROE % 0% 23% 28% 24% SOURCE: BELL POTTER SECURITIES ESTIMATES BELL POTTER SECURITIES LIMITED ACN AFSL DISCLAIMER AND DISCLOSURES THIS REPORT MUST BE READ WITH THE DISCLAIMER AND DISCLOSURES ON PAGE 6 THAT FORM PART OF IT. Page 1

2 Revenue $m Nanosonics (NAN) 16 January 2017 Potential for volatility ahead Figure 1 - Quarterly cash flow and revenues Summary of Quarterly Cash Flow s 2Q16 3Q16 4Q16 Q117 Q217 Revenues $m Sequential quarter revenue growth 41.2% 32.7% 24.8% 17.9% 2.8% Figure 2 - Revenue by quarter $'000 $'000 $'000 $'000 $'000 Receipts from Customers 7,216 12,138 15,467 20,220 17,174 Payments to suppliers and employees - 9,814-9,856-11,018-14,869-14,274 Gross cash flow from operations - 2,598 2,282 4,449 5,351 2,900 Net interest Tax Net operating cash flow s - 2,216 2,457 4,712 5,721 3,070 Investing activities Financing activities Opening cash 45,468 42,628 44,160 48,841 53,629 FX/other Closing cash 42,628 44,160 48,841 53,629 56, Q16 3Q16 4Q16 Q117 Q217 SOURCE: COMPANY DATA SOURCE: COMPANY DATA AND BELL POTTER SECURITIES ESTIMATES In the US market the installed base now exceeds 10,700 and this is in line with our expectation. The overall level of US market penetration is now likely to be in the order of 20%. NAN has continued to expand the market at 1,000 units per quarter for 5 consecutive quarters with reported revenues historically growing at a reasonably consistent $3m per quarter. In Q217 this trend was halted with revenues expanding by $0.5m relative to the previous sequential quarter. We attribute this change to an element of destocking either by the company itself or from GE Healthcare. Nevertheless 2Q17 remains a record revenue quarter. Looking forward, in order to maintain its current rating further revenue growth will be required. The company remains on track to achieve forecast revenues of ~$73m in FY17, however, FY18 is now less than 6 months away and consensus is for revenue growth of ~28%. We expect this revenue growth will come from a combination of the following. In order of important to overall revenue growth these are: There are now numerous agreements with other OEM platforms in the US. These include Siemens, Phillips and others who account for ~60% of the sonography market in the United States. Building out these new commercial relationships with these companies is likely to take many months and we are yet to see any material impact on revenues. We expect the Trophon will become a key component of future tenders for the supply of sonography equipment. Improved market penetration with existing hospital clients the Trophon is used in the vast majority of the top 50 hospitals in the US thanks largely to mandated use of high level disinfection of ultrasound probes. The sales and marketing team will continue to targeting additional users (i.e. other departments) within the existing client base; and Gradual expansion in the UK and Ireland. We estimate the company installed approximately 30 units in Scotland during the quarter. The operating lease model appears to be the preferred model going forward in the UK, hence this will necessitate future changes to earnings as revenues are spread over the operating life of each device. Page 2

3 Nanosonics (NAN) 16 January 2017 The company expects to provide a more detailed market analysis at the time of its half year result. TRANS PACIFIC PARTNERSHIP With the vast majority of its business located in the US, NAN has significant exposure to any changes to free trade arrangement with the United States. In particular the incoming Trump administration has threatened to tear up the TPP. The Trophon is assembled in Australia from components manufactured around the world. We are mindful of all commentary from the incoming Trump administration regarding potential trade barriers affecting imported finished goods to the US. Balancing this risk, the US cannot overnight impose import tariffs on imported products as to do so would cause untold supply disruption and or price rises, therefore, we are hopeful common sense will prevail and there is an orderly transition to the new trade arrangements. We also note there is no viable competing product to the Trophon. At this time, it is not possible to predict the impact, if any, of changes to trade arrangements with the US, but it will certainly be a far important consideration going forward. Figure 3 - Summary of price target calculation DCF Valuation - Firm Value ($1,000,000) $million Total PV of Explicit Free Cashflow Total PV of Continuing Year Enterprise Value Less Net Debt Equity Value 1,028.0 Number of Shares (million) Equity Value Per Share $3.45 Dividends prior to valuation base date yet to be received $0.00 Net cashflow valuation per share incl cum dividends $3.45 Franking Credits per share (valued at 30 in the $) $0.00 Total Value Per Share $3.28 SOURCE: BELL POTTER SECURITIES ESTIMATES Changes to earnings are immaterial. Price Target is amended to $3.28 from $3.23 and we maintain our hold recommendation. Page 3

4 Nanosonics (NAN) 16 January 2017 Nanosonics Nanosonics is a standout Australian company which has developed and commercialised the Trophon a device invented for the purpose of point of care infection control in the hospital or clinical setting. The Trophon provides high level disinfection (HLD) of sensitive medical instruments (that are not suitable for high temperature sterilisation) with the first application in sonography probes targeting obstetrics and gynaecology patients. The Trophon is the most significant innovation in patient and operator safety (in relation to sonography) since the invention of the ultrasound. The efficacy of the device in killing pathogens on the surface of intracavity and surface ultrasound probes is unquestionable and has been proven in clinical studies and backed up by broad adoption by the most prestigious hospitals across Australia and the United States. The benefits of the device were so convincing that GE Healthcare a large market participant in the medical imaging industry became the exclusive distributor of the Trophon in the US between 2012 to During this period, GE delivered immense value through its high profile promotion of the device. Nanosonics has now matured into a powerhouse promoter of the Trophon in its own right. While GE remains a non exclusive distributor, Nanosonics has a dedicated sales force in the US the deepest market in the world. In the year since it commenced in the US with a dedicated sales force, revenue growth has accelerated significantly as the Nanosonics team creates new sales opportunities at non GE Healthcare sites. The rest of the world market is largely untapped. The company has established beach heads in the United Kingdom and Germany and we expect rapid sales growth in these and other markets over the next two to three years. We conservatively estimate the global market for the Trophon amongst key markets as greater than 60,000 units. The company s estimates are larger but include markets not yet under consideration for business development. Key to opening these markets is finding the right distribution partner. Ideally Nanosonics will partner first before establishing or buying its own franchise in key markets, however, there are probably only 10 national markets of sufficient size to warrant a dedicated sales force. Nanosonics has a small R&D program. We understand the team may be focussed on development of the second generation Trophon which is expected before June This will coincide with the period when first generation Trophon devices come to the end of their useful lives. There are potentially numerous other applications for nano-nebulant technology in the medical setting, though first revenues from additional applications are not yet on the horizon. The company is yet to elaborate on the first target market outside of ultrasound. The company is led by Chief Executive Michael Kavanagh (formerly VP Global Marketing at Cochlear) and supported by an executive group, each of whom have many years experience in their relevant area of expertise. We expect NAN will generate its maiden profit in FY17. Page 4

5 Install Base Revenues A$m Nanosonics as at 16 January 2017 Recommendation Hold Price $3.16 Target (12 months) $3.28 Nanosonics (NAN) 16 January 2017 Table 1 - Financial summary Profit & Loss FY15 FY16 FY17e FY18e FY19e Valuation Ratios (A$m) FY15 FY16 FY17e FY18e FY19e Year Ending 30 June $m Reported EPS (cps) Total revenues Normalised EPS (cps) Revenues growth 3% 93% 71% 20% 24% EPS growth (%) 94% 103% Large 59% 8% EBITDA PE(x) na 5, Margin -21% 2% 23% 30% 34% EV/EBITDA (x) na 1, Depreciation EV/EBIT (x) na na EBIT NTA (cps) Net interest P/NTA (x) Pre tax profit Book Value (cps) Tax expense Price/Book (x) NPAT- normalised DPS (cps) Net abnormal items Payout ratio % % 20% Reported NPAT Dividend Yield % 0.0% 0.0% 0.0% 0.6% 0.6% Franking % Cashflow (A$m) FY15 FY16 FY17e FY18e FY19e FCF yield % -0.4% -0.4% 0.9% 2.4% 4.5% Gross cashflow from operations Net interest Performance Ratios FY15 FY16 FY17e FY18e FY19e Tax paid ROA -10% -1% 18% 23% 27% Other ROE -12% 0% 23% 28% 24% Operating cash flow ROIC -54% -3% 79% 87% 98% Maintenance capex Net debt/equity -83% -83% -75% -76% -76% Net debt/assets Free cash flow Gearing na na na na na Proceeds from issuance Total debt/ebitda (x) Movement in borrowings Interest cover (x) Dividend paid Interim results 2H15 1H16 2H16 1H17e 2H17e Other Revenues Change in cash held EBITDA Cash at beginning of period EBIT Cash at year end NPAT Balance Sheet (A$m) FY15 FY16 FY17e FY18e FY19e Install Base Cash USA 6,700 8,700 10,740 12,722 Receivables ROW 1,200 1,300 1,735 1,829 Inventory ,900 10,000 12,475 14,551 Other current assets Property, Plant and Equipment Intangible assets Other non current assets Total assets , Trade payables Provisions Other Borrowings Total Liabilities Net Assets ,000 50,000 40,000 30,000 20, Share capital Reserves Other Retained earnings Shareholders Equity ,000 - Global Install Base Revenues 50 0 SOURCE: BELL POTTER SECURITIES ESTIMATES Page 5

6 Nanosonics (NAN) 16 January 2017 Recommendation structure Buy: Expect >15% total return on a 12 month view. For stocks regarded as Speculative a return of >30% is expected. Research Team Staff Member TS Lim Sam Haddad Jonathon Higgins Title/Sector Head of Research Phone tslim shaddad jhiggins Hold: Expect total return between -5% John O Shea joshea and 15% on a 12 month view Chris Savage csavage Sell: Expect <-5% total return on a 12 month view Jonathan Snape Tim Piper John Hester Healthcare jsnape tpiper jhester Speculative Investments are either start-up enterprises with nil or only prospective operations or recently commenced operations with only forecast cash flows, or companies that have commenced operations or have been in operation for some time but have only forecast cash flows and/or a stressed balance sheet. Such investments may carry an Tanushree Jain Financials TS Lim Lafitani Sotiriou Resources Peter Arden David Coates Associates James Filius Healthcare/Biotech Banks/Regionals Diversified Resources Resources Associate Analyst tnjain tslim lsotiriou parden dcoates jfilius exceptionally high level of capital risk and volatility of returns. Bell Potter Securities Limited ACN Level 38, Aurora Place 88 Phillip Street, Sydney 2000 Telephone The following may affect your legal rights. Important Disclaimer: This document is a private communication to clients and is not intended for public circulation or for the use of any third party, without the prior approval of Bell Potter Securities Limited. In the USA and the UK this research is only for institutional investors. It is not for release, publication or distribution in whole or in part to any persons in the two specified countries. In Hong Kong this research is being distributed by Bell Potter Securities (HK) Limited which is licensed and regulated by the Securities and Futures Commission, Hong Kong. This is general investment advice only and does not constitute personal advice to any person. Because this document has been prepared without consideration of any specific client s financial situation, particular needs and investment objectives ( relevant personal circumstances ), a Bell Potter Securities Limited investment adviser (or the financial services licensee, or the representative of such licensee, who has provided you with this report by arraignment with Bell Potter Securities Limited) should be made aware of your relevant personal circumstances and consulted before any investment decision is made on the basis of this document. While this document is based on information from sources which are considered reliable, Bell Potter Securities Limited has not verified independently the information contained in the document and Bell Potter Securities Limited and its directors, employees and consultants do not represent, warrant or guarantee, expressly or impliedly, that the information contained in this document is complete or accurate. Nor does Bell Potter Securities Limited accept any responsibility for updating any advice, views opinions, or recommendations contained in this document or for correcting any error or omission which may become apparent after the document has been issued. Except insofar as liability under any statute cannot be excluded. Bell Potter Limited and its directors, employees and consultants do not accept any liability (whether arising in contract, in tort or negligence or otherwise) for any error or omission in this document or for any resulting loss or damage (whether direct, indirect, consequential or otherwise) suffered by the recipient of this document or any other person. Disclosure of interest: Bell Potter Securities Limited, its employees, consultants and its associates within the meaning of Chapter 7 of the Corporations Law may receive commissions, underwriting and management fees from transactions involving securities referred to in this document (which its representatives may directly share) and may from time to time hold interests in the securities referred to in this document. ANALYST CERTIFICATION Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers and were prepared in an independent manner and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed by that research analyst in the research report. Page 6