Nanosonics’ Delay Frustrates Investors

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Nanosonics remains a quality, structural growth story but the extensive delay in launching a second Trophon product has frustrated investors.

-Infection prevention likely to have a growth spurt post pandemic
-Acquisitions could be increasingly likely
-Hospital access remains an issue going into FY21
 

By Eva Brocklehurst

Covid-19 is likely to cast a shadow over Nanosonics ((NAN)) for some time but the growth story remains intact. That said, the pandemic has delayed the introduction of a second Trophon product and frustrated investors.

There were significant pandemic-related impacts on revenue in FY20 for both device sales and consumables, resulting from restrictions to access hospitals. Canaccord Genuity was somewhat surprised at the extent, having presumed the vast majority of procedures were non-elective.

Hence, while current circumstances are exceptional, it appears there is more variability in this particular revenue stream than previously anticipated. In the new financial year to date the company has noted a reduction in market access, higher distributor inventory and a slower recovery in consumables.

As a result, brokers have deferred revenue forecasts and downgraded estimates. However, UBS highlights the business is a high-quality, structural growth story, and that has not changed.

Infection prevention is likely to have a growth spurt post the pandemic and Nanosonics should be able to capitalise on this through its intellectual property. UBS suspects Nanosonics is collaborating with key industry participants to enhance its new platform product.

Product Delay

UBS considers the launch of a new product is highly likely in FY22, noting more detail is expected in the second half of FY21. Bell Potter also notes the delay but also that technical milestones are yet to be achieved and remains of the view there is no certainty of a launch in FY22 either. As future revenue remains speculative the broker includes a large discount for this risk.

The broker highlights the company's use of the word "likely" for deferring the product launch to FY22. There was little detail on progress and Wilsons was particularly irritated at the need to "guess", although understands management has been upfront about the problems faced in growing the Trophon business.

Still, the broker asserts the market appears to be valuing the second product at around $885m, sight unseen. The areas of the company's focus for R&D are unchanged and include instrument cleaning/disinfection, storage, environmental decontamination, compliance and traceability.

In the new era of Covid-19 chemistry is expected to play a part in reducing cross contamination of high contact surfaces. On the positive side, Morgans also points out enhancements have been identified to improve the potential when the product is ultimately launched.

Morgans remains of the view that the stock is a quality growth name and retains an Add rating, with the main change to estimates being the removal of the $12m of revenue that was assumed to come from new products.

Canaccord Genuity also welcomes the optimisation of the product platform before it is submitted to the US Food & Drug Administration. The broker assesses there are few catalysts now outside of acquisitions or product in-licensing. Hence, acquisitions could be increasingly likely, given the company's cash holdings of $92m.

Revenue in the final four months of FY20 was significantly affected by the closure of medical facilities. In the US, which represents more than 90% of total revenue, revenue grew 18% with a 38% increase in consumables and an -11% contraction in device sales.

No earnings guidance was provided for FY21 but the company has noted a lower installed growth in the base in the first half as hospital access remains an issue. Operating expenditure is forecast at $75-78m.

Bell Potter believes the US is likely to continue to be adversely affected by pandemic-related closures and is not optimistic that pre-pandemic levels of ultrasound activity will resume across the US at least until December 2020.

The broker, not one of the seven stockbrokers monitored daily on the FNArena database, downgrades to Sell from Hold and lowers the target to $4.95 from $5.52. Canaccord Genuity, also not one of the seven, agrees the delay in commercialising the new product is likely to frustrate investors and the share price may drift, retaining a Hold rating with a $5.46 target.

Wilsons, not one of the seven, maintains an Underweight rating, reducing its target by -13% to $3.90. The database has two Buy ratings and one Sell (Citi, yet to update on the FY20 financials). This results in a consensus target of $6.12, signalling -0.2% downside to the last share price.

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