Nanosonics (ASX: NAN): We like it long term, but see strong short term downside in 2022

Behzad Golmohammadi Behzad Golmohammadi, July 28, 2022

Who is Nanosonics? 

Nanosonics (ASX: NAN) is an infection prevention company that operates in Australia and internationally. The company sells the Torphon ultrasound probe disinfector and its associated consumables and accessories. It also provides Torphon2, an ultrasound probe high-level disinfection (HLD) device, Torphon EPR, a low-temperature high-level disinfection solution for intra-cavity ultrasound probes and Nanosonics AusditPro, an infection control workflow compliance management solution. 

 

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Selling worldwide 

Nanosonics’ products are approved for sale in Australia, New Zealand, the UK, Europe, Canada, the US, Singapore, Hong Kong, South Korea and Japan. It primarily sells to hospitals, sonographers, obstetricians and gynaecologists through direct operations as well as distribution partners. The company was incorporated in 2000 and is headquartered in Macquarie Park, Australia. 

To learn more about Nanosonics’ products and business model please read our report on the company in our ASX200 Stocks Down Under Publication. 

 

Nanosonics

Nanosonics, Daily Chart in Semi-log Scale (Source: Metastock)

 

❶ FY20 results show COVID-19 impacts on the Q4 revenues. (2020 Full Year Results – Investor Presentation) 

❷ A business update report shows recovering new installations revenue. (Nanosonics business update) 

❸ A CEO address mentions COVID-19 as a demand driver for Nanosonics products. (2020 Annual General Meeting Chairman’s and CEO’s Address) 

❹ 1HY21 results show decreased revenues on PCP (Prior Corresponding Period). (2021 Half Year Financial Results) 

❺ FY21 results show regaining sales momentum and progress with product developments. (2021 Full Year Financial Results Investor Presentation) 

❻ NAN revises its sales model with its US distributor, GE Healthcare, to create more direct sales channels. (Nanosonics’ revised sales model in North America) 

❼ 1HY22 results show increased operating costs. (2022 Half Year Financial Results) 

 

COVID-19 boosted sentiment around Nanosonics 

The first wave of the pandemic significantly affected Nanosonics new device installations in 4Q20 (the last three months to June 2020) as access to hospitals was limited by COVID-related restrictions. As hospital departments started to reopen in FY21, new installation revenues quickly recovered to pre-pandemic levels. 

The bullish sentiment on NAN as an infection prevention company operating in a pandemic era was further boosted by its CEO’s address that mentioned the company’s strategy to benefit from the globally accelerating demand for infection prevention solutions as a result of COVID-19. Nanosonics’ share price consequently rallied to its all-time high of $8.25 in January 2021. 

 

Nanosonics’ revenue growth disappointed in 1HY21 

NAN’s extremely rich valuation led to a plummet in the share price once the company announced decreased revenues in 1HY21 on PCP, mainly driven by lower demand from GE Healthcare, Nanosonic’ US partner, due to its high inventory levels. This was the opposite of what the market expected with respect to demand for NAN’s disinfection products in the midst of the pandemic. 

The company blamed the COVID restrictions for the decline in new installations as it was difficult for NAN’s distributors and sales reps to gain access to hospitals and medical centres. However, the sales of consumables and services increased, but these were more than offset by increased operating expenses. 

With the easing COVID restrictions momentum in Nanosonics’ new installations has now returned to pre-pandemic levels and we can expect this growth rate to continue for the foreseeable future. New COVID strains keep showing up and they are spreading faster than ever due to their mutations and fewer social restrictions in place. It means the increased demand for infection prevention will likely remain elevated in the foreseeable future. 

 

NAN’s extremely high valuation multiples make it vulnerable to interest rate hikes 

Based on consensus estimates, NAN trades at EV/EBITDA multiples of 90.1x and 58.4x for FY23 and FY24 respectively, which implies an expected EBITDA growth of 35% in FY23. NAN is also trading at a trailing P/E multiple of 126.2x, which reflects the huge growth premium in the stock’s valuation. 

With interest rates on the rise for the foreseeable future, extremely high valuation multiples like those of NAN will be subject to harsher adjustments in case of disappointments, which can significantly impact the stock’s share price. 

With most of Nanosonics’ revenue coming from US customers, the company’s revised sales model with GE Healthcare creates uncertainty around the rate of growth in FY23, in our view.  

In addition, NAN’s valuation reflects growth expectations from the commercial launch of its new products, in particular, Nanosonics Coris in endoscope processing. However, new product development and commercialisation is inherently risky because of potential delays in roll outs and other operational risks. 

 

The important $5.00 support level is broken 

Besides being an important psychological price level, the $5.00 level (the blue line on the chart) reversed NAN’s share price on multiple occasions in the last two years, which made it a very important support level for NAN stock. 

This important support level, however, broke after Nanosonics announced its revised US sales model (point 6 on the chart) and now it has turned into a resistance level.  

The price action after the recent rally to $5.00 signals significant weakness in the sentiment by forming a bearish engulfing candlestick pattern (Circled in blue, read our TA 101 with Stocks Down Under article to learn about this candlestick pattern). 

 

Potential downside to $3.00 

From a technical analysis point of view, this price action increases the chances of a price reversion to the latest low at $3.00 in the next few months to once again touch the 13-year uptrend (see NAN’s monthly chart below). 

On the other hand, a break back above $5.00 would signal a substantial bullish sentiment on the stock and opens the way up to higher prices. 

 

Nanosonics

Nanosonics, Monthly Chart in Semi-log Scale (Source: Metastock)

 

Attractive for long-term investors 

It is worth mentioning that we believe Nanosonics has a very solid business model with a bright long-term future as we expect demand for its products to remain elevated well into the future in the aftermath of COVID-19.  

The company already has a market share of more than half the US market and is steadily expanding into other markets, including Europe, Middle East and Asia Pacific. Nanosonics’ market share is largely protected by its Intellectual Properties (IPs).  

Additionally, it generates a considerable, ~75% gross profit margin on its consumables and services, which will increase as the company instals more of its devices in hospitals and medical centres around the world. 

 

Strong balance sheet 

As of 31 December 2021, NAN had $92m in cash and cash equivalents with no debts. The company invests in R&D on an ongoing basis to develop new products related to disinfection and decontamination, which could become future growth drivers. 

 

We like it long term, but see short term share price weakness 

Nevertheless, in the short-term we see more downside to NAN’s share price as we dislike the valuation for FY23. In the long-term, however, we expect the share price to grow alongside its long-term uptrend. 

 

 

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Frequently Asked Questions about Nanosonics (ASX: NAN)

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