Based on current fundamentals Nanosonic shares seem overpriced trading on a PE of 280x. Even with the full return of Pre-COVID earnings, NAN would still have a very expensive PE of around 125x. Nanosonics business is dependant on their sole product: the Trophon ultrasound probe sanitization system.
Should I Buy Nanosonic Shares?
NAN Shares Price
When looking at the historic share price trend of Nanosonics, investors saw a very rapid “V=shaped” recovery from COVID-19.
The COVID-19 pandemic saw Nanosonics share price drop 25% due to a ban on elective surgeries and drop off in demand for ultrasound cleaning devices
Long-term shareholders have made impressive gains off the back of NAN. Over the last ten years, the share has climbed more than 857%. In the past year, NAN shareholders have been left disappointed with the share price retracing -8%
In comparison, the market has returned 21.73% in the last year. And our portfolio has returned over 40%. View our portfolio here.
Nanosonic shareholders realized all-time highs at the beginning of 2021, with the share price peaking at $8.25. Since then the shares have retraced their gains and are on the lower end of the 52-week range.
NAN’s Principal Activity is the manufacturing and distribution of the Trophon ultrasound probe disinfector, its associated consumables & accessories, and Research, development & commercialization of infection control and decontamination products and related technologies. Source, Market Index
Trophon is fast becoming the global standard of care for ultrasound probe disinfection.
Nanosonic has commercialized Trophon across 29 countries throughout Asia, Europe, Middle East, North America, and Oceania.
Trophon is Nanosonic’s core product. There are two models within the product line: Trophon and Trophon 2.
Trophon is a box-like machine that is used to disinfect an ultrasound probe. Using high-frequency vibrations Trophon generates a ‘sonically activated’, hydrogen peroxide (H2O2) mist that kills bacteria, fungi, and viruses.
Trophon’s unique automated system uses ultrasonic vibration to convert high concentration hydrogen peroxide into mist particles. Which allows a deeper clean than wipes.
Nanosonics AuditPro is an automated and secure digital system that:
- Combines clinician infection prevention decision making, with
- trophon®2 infection control workflow data, and
- patient procedure information.
This provides you with real-time intelligence on ultrasound probes, operators, and infection control events to manage infection prevention.
After surveying 59 Investors about their current NAN shares sentiment: BUY-HOLD SELL, as well as their target price over the next 12-months here are the results;
The results from this survey show there seems to be a strong bearish investor sentiment on NAN shares. So how much are NAN shares worth? Let’s get into it.
|Volume 4W Avg||559,789|
|NTA per Share||$0.39|
Based on their current share price we can see NAN shares have a PE of 280.50x, which is well above the current inflated average of 20.8x. A company with a high PE could be seen as overvalued or that investors are expecting large growth in the future. They can also be seen as riskier.
Currently, NAN shares sit in the high PE band. Even with the full return of Pre-COVID earnings, NAN would still have a PE of around 125x.
Nanosonics is a small-cap company with a total market capitalization of just over $1.6 Billion. This places it as the 220th largest listed ASX company by market cap. For a company of this size, we expect a growth stock that may have the potential for above-average growth but also a higher degree of risk.
Medibank Shares current Beta is 1.22. Beta is a measure of a stock’s volatility in relation to the overall market. High Beta stocks are said to be riskier but provide higher return potentials, Source: Investopedia.
Earnings, Debt, and NTA per Share:
We can see NAN shares currently have earnings per share of 2 cents, this gives it its currently inflated PE of 280.50x. Another way of looking at this is only 0.35% of their share price is backed by solid earnings.
Nanosonic is debt-free. Their Net Tangible Assets per share is $0.39, representing 7% of the current share price.
Nanosonics is completely debt-free
Nanosonics being a small-cap company may pose some risk of market liquidity. There seems to be a healthy number of buyers and sellers, in the current market. We can see the average turnover for the company is 559,789 equating to just over $3.1 million daily.
Nanosonics is comparable to FPH, Cochlear and Resmed. We can see that NAN has a massively inflated price valuation compared to these competitors. Meanwhile, its ROE is relatively low and doesn’t seem to justify the PE ratio.
In February NAN ASX released its half-yearly reports to the market here are the highlights:
- Global installed base up 12% in last 12 months and up 6% in last 6 months to 25,100 units.
- Half year revenue of $43.1 million, down 11% compared with prior corresponding period.
- lower revenue was driven by the reduction in purchases by GE Healthcare due to the impacts of COVID-19 on its inventory, as well as the impact of a stronger Australian dollar.
- Global revenue recovered strongly in Q2 FY21, up 48% compared with Q1 FY21. This
- All revenue associated with I-MED’s upgrade of its 200+ trophon®EPR fleet, announced in November 2020, is expected to be recognised in H2 FY21 as new trophon2 systems are installed across their network.
- Half year consumables and service revenue of $33.7 million, down 1% PCP
- Operating profit before tax of $0.2 million, compared with $6.7 million in PCP
- Cash and cash equivalents of $87.9 million, providing ongoing strong foundation for continued investment in growth. The Company has negligible debt.
“It is very encouraging to see a significant recovery in the underlying growth momentum of the business across trophon adoption, consumables usage and overall growth, despite the continuing impacts of COVID-19.”Michael Kavanagh, CEO and President
Nanosonics has been growing their installed trophon units at a modest rate. Totalling 25,100 units in 2021. Profits have fluctuated greatly for NAN, who were susceptible to COVID restrictions and foreign exchange rates.
Total sales revenues have also fluctuated greatly since 2017. Although we are seeing product sales growth, revenues are yet to reflect this. It’s difficult to see how NAN can justify such a high earnings multiple.
We can see that from 2019 to 2020 revenues were impacted falling 11% to $43 Million. We can see that Nanosonics expenses also increased slightly with the group also realizing an “Other Loss” of $1.2 Million attributed to derivative financial instruments.
Net profits for the year were $1.464 Million representing a drop of -74%, after accounting for tax credits and foreign exchange shareholders realized profits of $4.197 Million.
Nanosonics has managed to grow its strong balance sheet during the year. Although cash and cash equivalents have fallen slightly to $87.895 Million, overall total assets are up 2% to $150 Million.
Cash Flow Statement
In summary, the short-term upside is likely to prevail as long as $5.18 is supported. The alternative scenario is that a downside breakout of $5.18 would call for $4.86 and $4.68.
Here’s A Breakdown Of The Detailed Technical Factors;
Support and Resistance Graph
Insider Ownership and Trading
We can see that the general public and institutions own the majority of Nanosonics shares. This is a common trend amongst most listed shares. We can see individual insiders have decent ownership of 16.1%.
We generally like companies with large insider ownership. Skin in the game helps ensure the management’s motives are in line with ours. We like small-cap stocks with ~30% insider ownership and history of owners buying on market.
|Holding Size||1-1,000||1,001-5,000||5,001-10,000||10,000-100,000||100,001 +||Total|
|No. of shareholders||9,935||6,370||1,508||1,165||99||19,077|
In 2021, there has been very little insider trading. We can see Non-executive Director Lisa McIntyre purchased $49,981 shares in February.
We discussed previously that Nanosonics was briefly impacted by restrictions as investors saw Nanosonics share price drop off 25% due to the ban on elective surgeries, which reduced demand for ultrasound cleaning devices.
Off the back of COVID-19 many shareholders argue that higher importance may be placed on stringent infection controls and possible regulations. Although this is only speculation and we are yet to see actual demand increase.
Competition and Nanosonics lack of diversification:
Nanosonic is completely dependant on the success of the Trophon system. The large majority of revenues arise from the installation and consumables of the system.
When we ask ourselves does the company have any competitive advantage? Do they have an economic moat? It is difficult to see their advantage.
“In business, I look for economic castles protected by unbreachable moats“.Warren Buffett
The five types of economic moats; (Source, Stock DD Checklist)
- Low-cost production; Companies that can keep their prices low can maintain market share and discourage competition.
- High switching costs; Customers and suppliers might be less likely to change companies or providers if the move will incur monetary costs, time delays, or extra effort. e.g. banks and power providers. ✓
- Network effects; network effect happens when the “value of a good or service grows” as it’s used by existing and new customers e.g. Amazon is an excellent example.
- Intangible assets; Brand identity, patents, and government licenses are examples of intangible assets. e.g. think Nike or Coca-Cola as an excellent brand and think of the government regulation surrounding gamble and the moat this creates for gambling companies. ✓
- Efficient scale. Companies that have a natural monopoly – or operate in markets or industries where there are few rivals. ✓
When looking at the five types of moats it can be argued that Trophon systems would have a high switching cost for medical imaging providers if they were to move to a competitor. However, long-term cost reductions may make this affordable.
Nanosonics Trophon system is branding as the best disinfecting system for ultrasound probs which is a strong intangible asset for the business.
They also arguably have a strong monopoly over the market.
Nanosonics is targeting:
- Continued growth in the trophon ecosystem and installed base across all regions;
- Growth in upgrades of trophon EPR to trophon2;
- Japan to become an important contributor to global installed base growth as well as further expansion into Asia Pacific including China;
- opportunities for strategic acquisitions and product licensing across key vectors of infection
“Our forward-looking growth agenda remains very much intact and indeed the COVID 19 pandemic increases our resolve to execute on this agenda.”Michael Kavanagh, CEO / President
Nanosonics is trading on a massively inflated PE of 280.50x, which is well above the current market average of 20.8x. At this valuation, the stock is seen as more expensive than its high PE healthcare competitors and even higher than technology stocks.
Nanosonic is more of a Healthcare discretionary business. There are many alternatives to ultrasound sanitization. Although the Trophon product is technology-based, the business model is more basic healthcare product discretionary.
I see the business as poorly diversified, with the entirety of earnings dependent on the Trophon system. With a clear lack of earnings and only modest product sales, it’s hard to justify such a high valuation for NAN shares.
At the current time, I am bearish on NAN shares. We don’t see them as a high conviction stock to add to our market-beating portfolio.
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