Company update 15 October 2015 NANOSONICS (NAN) GEHC inventory analysis suggests potential upside in FY16-17e We are expecting a positive quarterly report from Nanosonics towards the end of this month, describing their first period with a fully operational US direct sales channel. Having reviewed our model, we see three potential ways for Nanosonics to beat our forecasts this year. We estimate that US partner GE Healthcare still has 1,000 Trophon devices which could be sold into hospitals over the next 12 months, boosting the US installed base and Nano s related consumables sales. GEHC could also resume their Trophon re-stocking orders, sooner than anticipated. Finally, the Q1 update could prompt upgrades to our direct US sales forecasts, which were set very conservatively last time. Price target revised to $1.72 per share. BUY rating maintained. Key points Model review ahead of Nanosonics Q1 report and 4C we are expecting Nanosonics to announce aspects of their quarterly performance towards the end of October. The result is closely watched; given this is the first period with the company s US direct sales channel in full force. Our Q1 revenue forecast is A$5.8m, more than half of which relates to consumables and services. Installed base update a key catalyst for FY16-17 estimates we estimate that US non-exclusive partner GE Healthcare (GEHC) has 1,000 or more Trophon units remaining in their inventory, which could be released to the US hospital market over the next 12 months. All additions to the US installed base drive Nanosonics incremental consumable Sonex-HL cartridge (and other) sales. At present we do not have these GEHC inventory units in our forward estimates. Recognising them in equal tranches over the next 12 months could add ~$2.3m and ~$3.5m to our FY16 and FY17 revenue forecasts, respectively. Forecasts we have increased our near term revenue forecasts reflecting higher direct US sales and revised (favourable) FX assumptions. Our earnings changes bring Nanosonics breakeven point forward by ~8 months into FY17. Valuation $1.72 price target set with reference to DCF analysis. We view ~30% TSR as enough justification to reiterate our BUY rating. Risks and catalysts Catalysts a) commercial partnering arrangements in new markets; b) guideline updates favouring automated disinfection; c) FX tailwinds; d) improving visibility on sales mix (products, geographies); e) installed base growth. Risks a) slower-than-forecast sales development; b) operating margin structure and development; c) market downgrades. Year-end June (AUD) FY14A FY15A FY16F FY17F FY18F NPAT rep ($m) -2.6-5.5-4.3 1.7 7.5 NPAT norm ($m) -2.6-5.5-4.3 1.7 7.5 Consensus NPAT ($m) -2.0 9.8 25.9 EPS norm (cps) -1.0-2.0-1.5 0.6 2.7 EPS growth (%) 56.4-105.5 25.4 139.9 337.9 P/E norm (x) -134.3-65.3-87.5 219.4 50.1 EV/EBITDA (x) -185.6-72.4-81.1 162.7 42.5 FCF yield (%) -0.7-0.6-2.2 0.6 2.5 DPS (cps) 0.0 0.0 0.0 0.0 0.0 Dividend yield (%) 0.0 0.0 0.0 0.0 0.0 Franking (%) 0 0 0 0 0 Source: Company data, WHTM estimates, S&P Capital IQ 12-mth target price (AUD) $1.72 Share price @ 14-Oct-15 (AUD) $1.34 Forecast 12-mth capital return 29.1% Forecast 12-mth dividend yield 0.0% 12-mth total shareholder return 29.1% Market cap $378m Enterprise value $342m Shares on issue 284m Sold short 1.6 ASX 300 weight 0.0% Median turnover/day Shane Storey shane.storey@wilsonhtm.com.au Tel. +61 7 3212 1351 Joseph Michael, CFA joseph.michael@wilsonhtm.com.au Tel. 02 8247 3101 $ 1.80 1.30 12-mth share price performance NAN $0.4m 0.80 Sep-14 Jan-15 May-15 Sep-15 1-mth 6-mth 12-mth Abs return (%) -2.6-21.7 45.1 Rel return (%) -5.7-15.2 41.5 KEY CHANGES 03-Sep After Var % NPAT: FY16F -6.7-4.3 N/A norm FY17F -2.1 1.7 >99% ($m) FY18F 3.6 7.5 >99% EPS: FY16F -2.4-1.5 N/A norm FY17F -0.7 0.6 >99% (cps) FY18F 1.3 2.7 >99% DPS: FY16F 0.0 0.0 0.0% (cps) FY17F 0.0 0.0 0.0% FY18F 0.0 0.0 0.0% Price target: 1.68 1.72 2.8% Rating: BUY BUY XSI Rebased Wilson HTM Equities Research Issued by Wilson HTM Ltd ABN 68 010 529 665 - Australian Financial Services Licence No 238375, a participant of ASX Group and should be read in conjunction with the disclosures and disclaimer in this report. Important disclosures regarding companies that are subject of this report and an explanation of recommendations can be found at the end of this document.
PRICE TARGET Valuation WACC (%) 12 Terminal growth (%) 6 NPV Forecast FCF (A$M) 79 NPV Perpetuity (A$M) 373 Net Debt/(Cash) (A$M) 36 DCF Valuation (A$M) 488 Growth options (A$M) 0.0 NAN valuation (A$M) 487.8 Price Target KEY ASSUMPTIONS Revenue Growth (%) 21.1 44.3 3.4 35.0 27.3 26.0 34.3 36.5 EBIT Growth (%) 6.7-56.0 105.5-10.4-119.1 582.2 160.3 91.4 NPAT Growth (%) 23.3-54.8 109.6-21.0-139.9 337.9 146.4 88.8 EPS Growth (%) 10.7-56.4 105.5-25.4-139.9 337.9 146.4 88.8 EBIT / Sales (%) -43.0-13.1-26.1-17.3 2.6 14.1 27.3 38.2 Tax Rate (%) -0.6 1.2 0.1 0.0 0.0 0.0 0.0 0.0 ROA (%) -19.0-8.4-9.6-9.0 1.6 8.6 17.2 27.8 ROE (%) -26.6-12.7-12.2-10.5 3.7 12.2 22.0 34.0 Price target ($/sh) 1.72 INTERIMS ($m) Half-year (AUD) Dec 14 Jun 15 Dec 15 Jun 16 1HA 2HA 1HE 2HE Sales revenue 14.3 7.9 12.3 17.7 EBITDA 1.3-6.1-3.3-0.9 EBIT 0.9-6.7-3.8-1.4 Net profit 1.2-6.7-3.4-0.9 Norm EPS 0.5-2.5-1.2-0.3 EBIT/sales (%) 6.2-84.9-31.2-7.7 Dividend (c) 0.0 0.0 0.0 0.0 Franking (%) 0.0 0.0 0.0 0.0 FINANCIAL STABILITY Year-end June (AUD) FY15A FY16F FY17F Net debt -45.7-36.1-37.4 Net debt/equity (%) <0 <0 <0 Net debt/ev (%) <0 <0 <0 Current ratio (x) 4.0 3.6 3.6 Interest cover (x) 17.6 5.9 <0 Adj cash int cover (x) 8.4 10.7 <0 Debt/cash flow (x) <0 0.0 0.0 Net debt (cash)/share ($) <0 <0 <0 NTA/share ($) 0.2 0.1 0.2 Book value/share ($) 0.2 0.1 0.2 Payout ratio (%) 0 0 0 Adj payout ratio (%) 0 0 0 EPS RECONCILIATION ($m) FY15A FY16F Rep Norm Rep Norm Sales revenue 22 22 30 30 EBIT -5.8-5.8-5.2-5.2 Net profit -5.5-5.5-4.3-4.3 Notional earn 0.0 0.0 0.0 0.0 Pref/conv div 0.0 0.0 0.0 0.0 Profit for EPS -5.5-5.5-4.3-4.3 Diluted shrs (m) 267 267 283 283 Diluted EPS (c) -2.0-2.0-1.5-1.5 RETURNS FY15A FY16F FY17F FY18F ROE (%) -16.8-10.2 4.2 16.4 ROIC (%) -129.3-224.0 15.5 108.2 Incremental ROE -24.9 11.5-465.5 125.6 Incremental ROIC 66.7-27.9 150.9-3,542.8 PROFIT AND LOSS ($m) Sales revenue 14.9 21.5 22.2 30.0 38.2 48.1 64.6 88.2 EBITDA -5.4-1.8-4.7-4.2 2.1 8.0 19.1 35.4 Depn & amort 1.0 1.0 1.1 1.0 1.1 1.3 1.5 1.7 EBIT -6.4-2.8-5.8-5.2 1.0 6.8 17.6 33.7 Net interest expense -0.7-0.2-0.3-0.9-0.7-0.8-1.0-1.4 Tax 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Minorities/pref divs 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Equity accounted NPAT 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Net profit (pre-sig items) -5.8-2.6-5.5-4.3 1.7 7.5 18.6 35.1 Abns/exts/signif 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Reported net profit -5.8-2.6-5.5-4.3 1.7 7.5 18.6 35.1 CASH FLOW ($m) EBITDA -5.4-1.8-4.7-4.2 2.1 8.0 19.1 35.4 Interest & tax 1.1 0.0 0.3 0.9 0.7 0.8 1.0 1.4 Working cap/other -0.2-0.7 2.0-5.2-0.4 0.6-1.4-3.5 Operating cash flow -4.5-2.6-2.4-8.5 2.5 9.4 18.7 33.3 Maintenance capex 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Free cash flow -4.5-2.6-2.4-8.5 2.5 9.4 18.7 33.3 Dividends paid 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Growth capex -1.4-0.5-2.3-1.1-1.2-1.2-1.3-1.3 Invest/disposals 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other inv flows 0.0-0.2 0.6 0.0 0.0 0.0 0.0 0.0 Cash flow pre-financing -5.9-3.3-4.1-9.6 1.3 8.2 17.4 32.0 Funded by equity 0.5 0.3 28.0 0.0 0.0 0.0 0.0 0.0 Funded by debt 0.0 0.2 0.0 0.0 0.0 0.0 0.0 0.0 Funded by cash 5.3 2.7-23.9 9.6-1.3-8.2-17.4-32.0 BALANCE SHEET SUMMARY ($m) Cash 24.1 21.2 45.7 36.1 37.4 45.6 63.0 95.0 Current receivables 4.2 5.7 3.9 6.2 7.9 7.0 8.0 9.3 Current inventories 2.9 4.2 6.2 9.7 8.7 9.3 10.0 13.0 Net PPE 1.8 1.8 3.6 3.7 3.8 3.7 3.5 3.1 Investments 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Intangibles/capitalised 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Other 0.6 0.6 1.0 1.0 1.0 1.1 1.1 1.1 Total assets 33.7 33.5 60.4 56.7 58.8 66.7 85.6 121.5 Current payables 3.0 3.0 2.7 3.3 3.5 3.7 3.9 4.6 Total debt 7.6 8.1 0.0 0.0 0.0 0.0 0.0 0.0 Other liabilities 1.4 2.0 12.9 13.1 13.2 13.3 13.4 13.6 Total liabilities 11.9 13.1 15.7 16.4 16.7 17.0 17.4 18.2 Minorities/convertibles 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Shareholder equity 21.7 20.4 44.7 40.4 42.1 49.6 68.2 103.3 Total funds employed 29.3 28.5 44.7 40.4 42.1 49.6 68.2 103.3 Wilson HTM Equities Research 2
Model review ahead of Q1 updates Forecast revisions due to modest volume estimate increases and FX changes The table below sets out the changes to our Nanosonics forecasts following our recent FX updates. We have also made small upgrades to our US Trophon volume forecasts. Table 1: Changes to FY16e and FY17e forecasts Source: WHTM Research FY16e Previous Current %chg Previous Current %chg Sales revenue $m 26.6 30.0 13% 32.9 38.2 16% COGS $m 7.4 8.0 8% 9.1 10.0 9% Gross profit $m 19.2 22.0 15% 23.8 28.2 19% Gross margin % 72.0% 73.2% 1% 72.3% 73.9% 2% Opex $m 25.8 26.2 2% 25.5 26.1 3% EBITDA $m -6.6-4.2 36% -1.7 2.1 224% D&A $m 1.0 1.0-3% 1.1 1.1 1% EBIT $m -7.6-5.2 32% -2.8 1.0 135% Net interest $m 0.9 0.9 0% 0.7 0.7 0% Tax $m 0.0 0.0 0.0 0.0 NPAT $m -6.7-4.3 36% -2.1 1.7 182% EPS cps -2.4-1.5 36% -0.7 0.6 187% DPS cps 0.0 0.0 0.0 0.0 FY17e Upside profile We have kept our forecasts relatively conservative, heading into the Q1 report, which will describe the first full trading period for Nanosonics US-based, direct sales force. A number of factors could influence our forecasts positively over the next few reporting periods. Q1 report expected late October we are forecasting A$5.8m revenue for Q1, featuring higher gross margins given the increased proportion of consumables and service revenue in the mix. We understand that service contracts and other SKUs outside the consumable, Sonex-HL hydrogen peroxide cartridges, are as high as 10% of revenues, and tend to grow in line with the installed base. With US direct sales just ramping up and no expected sales to GE Healthcare (GEHC) in Q1, we calculate consumables and services contributing ~56% of revenue in the quarter. Installed base update a potential driver of upgrades at the FY15 results Nanosonics described the US installed base as more than 5,000 Trophon units. The majority of these devices have been placed into clinics by GEHC, with or without Nanosonics marketing assistance. We estimate that GEHC could have approximately 1,000 Trophons remaining in their inventory, which could be released to the hospital market over the next 12 months (GEHC s timing and inclination both uncertain). All additions to the installed base drive incremental Sonex-HL cartridge sales. At present we do not have these GEHC inventory units in our forward installed base forecasts. Adding them in equal tranches over the next 12 months would add ~$2.3m and ~$3.5m to our FY16 and FY17 revenue forecasts. Table 1: GEHC could have as many as 1,000 Trophons to release into the US market, which could increase the installed base and consumables sales over the next year. 1HFY11 2HFY11 1HFY12 2HFY12 1HFY13 2HFY13 1HFY14 2HFY14 1HFY15 TOTAL US reported sales (A$m) - 0.3 3.7 6.5 3.0 10.1 8.0 10.2 12.1 54.0 US reported sales (US$m) - 0.4 3.9 6.7 3.2 10.3 7.4 9.3 10.8 51.8 Estimated Trophon EPR sales (US$m) - 0.3 2.7 4.7 2.2 7.2 5.2 6.5 7.5 36.3 Average Trophon EPR selling price (US$ net to Nanosonics) 5,500 Implied Trophon EPR unit sales 6,596 - less approximate US installed base 5,500 GEHC inventory (Trophon units) 1,096 Source: WHTM Research Wilson HTM Equities Research 3
GEHC s inventory clearance a potential catalyst for resumption of Trophon purchasing GEHC may resume purchasing Trophons from Nanosonics once inventories are worked down. GEHC sold approximately 500 Trophons into the market in the Q4FY15 period suggesting that they could have organic, clinic-level demand for as many as 2,000 units, annually, with no growth. We have modelled no sales to GEHC in FY16, given where we think GEHC s inventory levels currently sit. We have modest GEHC sales commencing this time next year (2HFY17), finally helping sustain US volume growth at 40% or above in the outer years (FY19 onwards). Valuation To set our $1.72 per share price target we use a discounted cash flow methodology. We maintain a BUY rating given the upside to our revised target price. Table 2: Forecast and valuation framework for Nanosonics FY15E FY16E FY17E FY18E FY19E FY20E FY21E FY22E Market data (units) Average global installed base (epr trophons) 5,731 7,277 9,359 11,777 15,031 19,676 26,313 35,802 Sonex cycles, millions 5.0 6.4 8.5 11.3 14.4 18.8 25.5 34.6 Utilisation (cycles/trophon/day) 3.4 3.4 3.5 3.7 3.7 3.7 3.7 3.7 Revenue (AUDm) 22.2 30.0 38.2 48.1 64.6 88.2 123.1 172.2 grow th 3.4% 35% 27% 26% 34% 36% 40% 40% Gross Profit 15.3 22.0 28.2 36.2 48.8 66.8 93.5 131.0 - gross margin 69% 73% 74% 75% 76% 76% 76% 76% Operating items US SG&A 5.4 6.7 6.5 7.1 7.6 8.3 8.9 9.7 Other expenses 14.6 19.5 19.6 21.1 22.1 23.1 24.2 25.4 - expense grow th 15% 31% 0% 8% 5% 6% 6% 6% EBITDA (4.7) (4.2) 2.1 8.0 19.1 35.4 60.3 96.0 - operating margin 17% 30% 40% 49% 56% NPAT (5.5) (4.3) 1.7 7.5 18.6 35.1 45.5 67.2 EPS (2.0) (1.5) 0.6 2.7 6.6 12.4 16.1 23.7 - EPS grow th 338% 146% 89% 30% 48% Free cash flow (5.2) (0.1) 7.0 17.4 31.6 41.5 62.7 Valuation PV of FCFF = 78.7 WACC 12.0% PV of Terminal Value = 373.0 Tg 3% Value of Operating Assets = 451.7 Net debt (cash) 36.1 Value of Equity = 487.8 Value of Equity per share = 1.72 Source: WHTM Research Wilson HTM Equities Research 4
(NAN) BUSINESS DESCRIPTION (NAN) develops, manufactures and markets equipment for the high level disinfection of ultrasound probes and other pieces of medical device hardware. Its products are underpinned by a NanoNebulant technology very fine, nebulised droplets of concentrated hydrogen peroxide which kill microorganisms on surfaces. Its lead product, the Trophon EPR, is now available in most major markets for disinfecting obstetrics/gynaecologic probes. INVESTMENT THESIS Our thesis on Nanosonics is that, in time, regulatory pressure will build within the radiology industry to provide greater safety and traceability. This should entail a shift away from the use of toxic, bulk liquid disinfection practices. REVENUE DRIVERS Has a non-exclusive distribution arrangement with GEHC for the US and Canadian markets Network of third-party device distributors in Europe Revenue a function of both device sales (capital equipment) and consumables (cartridges of hydrogen peroxide and other products used with every disinfection cycle) MARGIN DRIVERS Gross margins: devices (c.60-75%); consumables (c.80-90%) Contract pricing may be variable Business development expenses expected in both Europe and US business building channels, increasing awareness, providing additional customer support KEY ISSUES/CATALYSTS Upside risks: Faster-than-expected sales traction in the US by GEHC Decision to scale-up manufacturing a leading indicator of demand Partnering transactions on other projects disinfection units for transesophageal transducers, other applications RISK TO VIEW Downside risks: Large partners like GEHC are slow to move Regulatory and/or clinical practice changes take a long time to change All device manufacturers face scale-up, quality control risks BALANCE SHEET Nanosonics had c.$45m cash as at end-fy15 BOARD Mr Maurie Stang (Non-Exec. Chairman) Dr Ron Weinberger (CEO, Executive Director) Mr Richard England (Non-Exec. Director) Dr David Fisher (Non-Exec. Director) Mr Michael Kavanagh (Non-Exec. Director) MANAGEMENT Mr Michael Kavanagh (CEO, Executive Director) Mr McGregor Grant (CFO) CONTACT DETAILS Address: Unit 24, 566 Gardeners Rd, Alexandria NSW 2015, Australia Phone: +61 2 8063 1600 Website: www.nanosonics.com.au Wilson HTM Equities Research 5
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