Nanosonics: Strong share price move prompts a pause

About the author:

Scott Power
Author name:
By Scott Power
Job title:
Senior Analyst
Date posted:
19 June 2019, 11:22 AM
Sectors Covered:
Healthcare, Life Science and Technology

August result may provide buying opportunity

Nanosonics (NAN) will report its FY19 result in late August and after a solid 1HFY19 result, assisted with the favourable timing of a number of costs, the share price rallied 12.4% on the day of the release. Management has provided guidance of operating costs of A$50m for FY19 (1H costs were A$21.5m, implying 2H costs of A$28.5m). If we assume a broadly similar revenue result 1H/2H of approximately A$41m (in line with consensus) then the 2H EBITDA could potentially by A$7m lower than the 1H. Consensus (Bloomberg) forecasts has an EBITDA of A$13.1m for FY19.

If we look at share price movements on the day of reporting, we note that 3 out of the last 4 times the share price has reacted negatively (+12.4% in 1HFY19, -1.4% in FY18, -12.1% in 1HFY18 and -7.2% in FY17). We are looking to that August result as a potential buying opportunity.  

New product launch to help drive future earnings growth

To help drive future earnings growth the following milestones need to be achieved:

  1. the first of a range of new infection control products to be launched (subject to regulatory approval) by the end of FY20;
  2. the new distribution agreement with GE Health takes effect from 1 July 2019, whereby NAN will assume all consumable revenue and margin in North America;
  3. sales in Europe are expected to benefit from new disinfection guidelines in Germany and France;
  4. unit growth in the UK is targeted to 50% higher than FY18; and
  5. a second clinical study in Japan, with pre-marketing activities and regulatory approval expected by the end of CY19 (note we have not factored any contributions into our FY20 forecasts.

Investment view

We have made no changes to forecasts. However we have rolled our model forward and as a result have increased our DCF valuation and share price target (Morgans clients can login to view).

Given the strong share price performance we have moved to a Hold recommendation (previously Add). The downside risk is a delay in the release of the new product and the upside risk is a greater contribution from ex-US markets. Although we have adjusted our recommendation to Hold we remain positive about the company and are looking for a better entry point.

More information

Morgans clients can login to view our detailed report and increased share price target for Nanosonics (NAN). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.

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