1H result beats our estimates
NAN posted a 1HFY17 result of A$22.0m which included a tax benefit of A$11.7m, as management determined that it is probable that taxable profits will be generated against carried forward tax losses in the Australian entity. The NPBT was A$10.3m which was ahead of our forecast of A$6.0m. Sales were A$36.1m (up 33% on the previous half) and it related to strong trophon adoption driven by:
- the direct sales force and the GE Healthcare distribution arrangement in the US, with an installed base at 10,700 units;
- direct operations established in Canada;
- six of the fourteen Scottish NHS trusts adopting the trophon; and
- increased awareness in France and Germany of infection guidelines.
The gross margin improved to 73% from 72% (prior half) and EBITDA was $43.5m (compared with A$29m in the previous corresponding period). Free cashflow was A$8.2m (up 19% on prior half), which resulted in a solid cash balance of A$56.9m.
Changes to forecasts – tax adjustment and gross margin upgrade
In FY17 we include the A$11.7m tax benefit in our forecast and note that future periods will be reviewed by management and adjusted accordingly. At this stage we have made no other changes to the tax calculation in the short term.
We have upgraded our revenue by 2% to A$72.4m. Management has reconfirmed operation cost guidance of A$39.0m for FY17. We have adjusted our model to reflect the 73% gross margin and the cost base resulting in a 14.1% upgrade to NPBT. We have increased our gross margin by 3% to 73% in FY18 and by 2% to 72% in FY19, reflecting a greater contribution from the higher margin consumables business. This results in NPAT increasing by 13.0% in FY18 and by 8.0% in FY19. From FY20 we have now assumed NAN pays a full rate of tax, which has decreased our longer term forecasts.
Catalysts to watch for
Key catalysts include the release of the high level disinfection guidelines in England (due this quarter) and updates on expansion opportunities into Japan and the Middle East.
Given the changes to our forecasts, our DCF valuation (and share price target) have been reduced slightly. The key risk to our target price is a slower-than-expected US sales ramp.
We retain our Add recommendation.
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