Nanosonics: Result 2018
Recommendation
Nanosonics has announced a decent full-year result with the installed base of its Trophon units rising 25% to 17,740 units, including 26% growth in North America and 49% growth in Europe. The growing installed base is the main reason why sales of consumable items (such as sterilisation cartridges) grew 25% to $35m and now account for more than half the total revenue.
Unfortunately, total revenue of $60.7m for the year to June was down 10% compared to last year (or down 8% after removing the effect of currency fluctuations). For shareholders who are used to double-digit growth, that's quite the wake-up call. However, this is mainly down to distributors de-stocking the first version of Trophon and delaying purchases after Trophon 2 received US and European regulatory approval in April and June, respectively (see Nanosonics and that one pesky customer). Management says the commercialisation of Trophon 2 began earlier this month.
The revenue decline also reflects a higher proportion of sales from Managed Equipment Service contracts in the UK, where Nanosonics doesn't sell the Trophon device to the healthcare facility, but rather continues to own it after installation. The hospital then pays an all-inclusive price for the disinfection cartridges and maintenance over a set timeframe – which can run at up to twice the normal rate. This means higher margins for Nanosonics over the long term, but less revenue is recognised upfront.
Net profit fell from $13.9m to $5.6m mainly due to a 20% increase in selling and administration expenses. Nanosonics is still best thought of as a start-up with significant potential for sales growth, so investing in its sales team, marketing, and research is the right move at this stage of the game. We're more interested in how quickly the installed base of Trophon units is growing and the margin on consumable sales. If the company gets these things right and continues to grow, profits will rise rapidly in the years to come.
Nanosonics remains on track and the company's cash balance of $69m means it has plenty of funding for its immediate growth plans. The stock has more than quadrupled since we first upgraded it in Nanosonics builds a better mousetrap on 9 Mar 14 (Speculative Buy – $0.785). However, Nanosonics is still a small, risky, one-product company and only deserves to represent a tiny slice of your portfolio. It's also trading with a market capitalisation some 17 times revenue, meaning that if growth slows or there are any regulatory hiccups, the stock could easily drop 50% or more. We continue to recommend taking profits and note our maximum portfolio weighting of 2%. HOLD.
Note: The Intelligent Investor Equity Growth Portfolio owns shares in Nanosonics. You can find out about investing directly in Intelligent Investor and InvestSMART portfolios by clicking here.
Disclosure: The author owns shares in Nanosonics through his interest in the Intelligent Investor Equity Growth Portfolio.