Has a buying opportunity presented in Nanosonics after the first half fell short of expectations?<\/p>\n
-Earnings hit reflects inventory timing and likely to be temporary By Eva Brocklehurst<\/p>\n Nanosonics ((NAN)), a producer of high-level disinfection solutions for medical devices, disappointed the market with a first half result that was well behind forecasts. Sales fell -4%, reflecting a reduction in consumables and accessories provided to distributor GE Health.<\/p>\n Revenue took a hit, despite 86% growth in UK units and sales in the German and Middle Eastern markets, because of a stock order by GE that affected reported sales. GE installed new units from its inventory rather than purchase from Nanosonics.<\/p>\n This is primarily a timing issue, Canaccord Genuity contends, as the main metrics for investors centre on expanding the installed base, which should drive long-term growth in consumables.<\/p>\n In the UK the installed base is expected to grow by 100% in FY18. The company has also reached a new agreement, effective July 2019, which is expected to provide a material increase in revenue and margin from the sale of consumables to the existing GE Health base.<\/p>\n Management is pursuing growth options in Europe amid several new product campaigns and this makes FY18 an intensive year for investment<\/strong>. At the same time, the company is making it easier for clinics to obtain its key product, Trophon.<\/p>\n In some cases this is the at the expense of upfront revenue as the company seeks to grow the installed base. Shareholders, Wilsons suggests, should enjoy a major pay-off from the annuity profit base growing at double-digit rates.<\/p>\n Canaccord Genuity agrees the key for the Trophon business is about expanding the base<\/strong>. This could ultimately make it the standard of care, as well as drive annuity revenue from the sales of high-margin consumables.<\/p>\n The US has achieved around a 35% market adoption and Australasia around 70%. The broker also expects an uptick from July 2019 when GE moves to re-seller arrangement that puts Nanosonics in charge of all US consumables sales.<\/p>\n The main risk to forecasts, Morgans believes, is a slower ramping up of sales in the US. The Trophon installed base in the US increased by 1700 units to 14,100.<\/p>\n Buying Opportunity<\/u><\/p>\n Morgans believes the reaction in the share price to the results means a buying opportunity is presented. The broker expects further investment in new products will drive growth and maintains an Add rating. Target is $3.22.<\/p>\n Wilsons reduces FY18 net profit estimates by around -$5m to reflect lower sales and an increase in R&D expense. This broker also believes investors should take advantage of the share price weakness and maintains a Buy rating and $3.34 target.<\/p>\n Canaccord Genuity downgrades to Hold from Buy, expecting the stock to come under near-term pressure until the growth drivers kick in. Target is $2.55.<\/p>\n Bell Potter believes the stock remains expensive, although FY18 was always going to be a year of investment. The broker continues to expect stronger earnings growth in FY19 as the US base expands and Trophon gains traction in Europe. The broker has a Hold rating and $2.48 target.<\/p>\n Further Product Development<\/u><\/p>\n Management has held back on releasing other products in the R&D pipeline for competitive and IP protection reasons, Wilsons notes. These should be launched over FY19-20 and improve the existing sales in infection control mechanisms.<\/p>\n Canaccord Genuity expects the new products in the pipeline, including a second-generation Trophon that is expected to have a higher price point, could all be launched in the next 18-24 months and target the same customers through the channels that have been developed for Trophon.<\/p>\n In the past, product development candidates have included high-level disinfection solutions for trans-oesophageal echocardiogram probes and endoscopes. In both instances this would represent market opportunities at least on par with Trophon, Wilsons believes.<\/p>\n<\/p>\n
\n-Trophon forecasts centre on expanding the installed base
\n-High expectations for new products to be launched in FY19\/20<\/strong>
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