Ann: 30 June 20 Business Update, page-4

COMPANY Compumedics	MCAP $67m	$0.38/share	Date: 7 September 2020
RECOMMENDATION Buy with PT $1.00/share (down 17%), High Risk
EVENT Essential diagnostics in all global regions
KEY POINTS
· CMP’s FY’20 net cash position improved $1.5m to $4.3m during the toughest of three major demand downturns since 2000. · CMP had no access to 75% customer locations for around three to six months during June half. Its sales reduction of just 15% is proof of its essential and nimble global diagnostic services. · Point of care and eHealth services received a boost as physicians moved sleep and neuro services to local and home bases. · Step-out growth MEG (brain wave measurement) is delayed 12 months, but Somfit (consumer sleep) has many more options. · CMP has prepared itself to thrive in these recovery phases with the fall range of hospital and point of care (POC), equipment and in-country distribution suited to each region.
FY’22F METRICS PER 9.6x | EV/EBITDA 5.2x | Yield 0%
LINK TO RESEARCH RR_CMP_200907 (7 pages)
INVESTMENT VIEW
We retain a Buy on CMP and expect it to re-rate towards $1.00/share as: · Base (sleep & neuro diagnostic devices & services) deliver steady revenue over next two halves with nimble distribution and new products, and POC/eHealth moves into growth leverage around the USA backbone and EU and China start. · Blue sky from Step-outs becomes more tangible with new orders of MEG in 2H’20F and a distribution partner for Somfit. STEPS TO $19m EBITDA OVER THREE YEARS FROM UNDERLYING $6m BASE 1 – Full range of sleep and neuro diagnostics. CMP now has three tiers of distribution (premium, mid-level and eHealth) with full range of products. This one stop shop for premium sleep and neuro labs and basic day centres was the key to winning Adventist’s preferred vendor status for its 48 US hospitals in 2019, and doing similar in EU and China. 2 – Consumables and eHealth are expanding profitably. Most on CMP’s FY’20 EBITDA came from sale of consumables, and profitable leverage of POC/eHealth US network. This after sales global support to the installed base of 23,000 devices, and “designed for Covid-19 times” at clinic or at home service are carrying CMP’s FY’21 cash flow growth and maintaining “Compumedics” as the preferred global brand. 3 – MEG roll-out is delayed. Somfit is spoiled for choice. CMP installed its first MEG at Barrow Neurological Institute in Phoenix USA during May 2019. This was a huge coup because of its leading global standing in neurological diagnostics and treatment for major disease (Alzheimer’s, dementia, epilepsy, Multiple sclerosis). But the 50 buyers of MEG on the waiting list, including four with funding approved and part complete due diligence cannot get access to BNI. CMP has taken the conservative approach and written down the capitalised cost of $7.7m. There is now $2.7m of commercialisation cost in balance sheet Somfit was a ~$2m loss maker in FY’20 with second year trial with regional sports team and product development for Covid-19 applications.
COMPANY BACKGROUND
Compumedics (CMP) is a leading supplier of sleep and neurological diagnostic devices globally, with around 23k units installed and 1,500 units sold annually for $9k to $25k. 15-20% of group sales come from recurring services for existing units. CMP has captured around 30-40% of the premium end of sleep and neurological clinics across Nth America, Europe and China/Japan/Australia. Since 2012 CMP has developed a lower cost solution for sleep/diagnostics with simpler units and an eHealth platform for the smaller testing centres. CMP has recently filled out its product range of hospital, clinic, ambulatory (at home) which suit the “all in one” hospital and clinic tenders. The base hospital/clinic business is ~33% of CMP’s value, and the emerging point of care (POC)/eHealth division will grow to ~33% by FY’23. CMP has also upskilled its neurological devices to move from a software supplier to 100 (of 130) ~A$5m Orion MEG <MagnetoEncephaloGraphy> machines to a supplier of the full device with Korean Partner (KRISS). The first Orion MEG was installed in reference Barrow Institute in Arizona USA in 2019. CMP is considering taking a simple sleep diagnostic device (Somfit) to the retail market. It would prefer to do with a consumer goods partner, particularly now with Government and distributor requests for additional diseased testing (temperature for Covid-19 & influenza).
KEY DRIVERS
·Sleep and neuro diagnostic growth in US, EU, Chinese clinics (hardware & software) and US smaller centres/home (amplifier & cloud). Consumables are 15% of sales and rising.
·Brain wave diagnostics for autism, dementia & other neurological conditions require a 10x faster and more accurate MRI which is a new machine (MEG MagnetoEncephaloGraphy)
·Consumer sleep and disease testing with simplified sensor (Somfit)
MILESTONES
·FY’21F – Resilient sales and new product launches (including double dewar MEG) ·Late 2021 – Somfit distribution partner ·FY’22F MEG – 2 orders (1 USA, 1 Korean) ·FY’23F $19m EBITDA, Base sleep/neuro 33%, POC/eHealth 33%, MEG 33%
RISKS
· Core sleep and neuro diagnostic business is restricted by Covid-19 across all three major regions: USA, EU and China. These $9k to $25k per unit core sleep and neuro diagnostic business is usually the cash cow of CMP. Mitigation: CMP can nimbly direct its in-country sales force (US, Germany, France, Australia), long standing distributors (China) and #1 neuro/sleep distributor (Japan) to adapt to status of regional access. More importantly these in-country teams are leveraging from an installed base of 23,000 units and significant new product launches targeting large hospital services, as well as small clinics.
· $5m “Orion Lifespan™” MEG machine adoption rate is slow. Issue: From 2005 to 2017 there were 10 units sales per year of lower accuracy MEG (80% with CMP software) into research hospitals. The pause over last three years was initially to wait for installation of the upgraded CMP/KRISS Orion MEG at the US – Barrow National Institute in 2019. But the pause has now been extended 12 months because the 50 buyers of MEG on the waiting list, including four with funding approved and part complete due diligence cannot get access to BNI. Unfortunately, BNI is in the centre of a Covid-19 hot spot. This has frustrated efforts to modify the MEG to treat adults and children with same machine setting (double dewar). Individual hospital local budget allocation and building space require a commitment of up to $10m, so hospitals are going to wait to see how their own Covid-19 budgets are panning out and want to see BNI before committing this large resource.
· $200 Somfit consumer product is engineered too much and misses at home sleep and other possible applications (Covid-19). Mitigation – CMP is trying to partner Somfit with distribution and manufacturing companies. CMP is doing trials with Diabetes, Sporting groups and possibly other diseases (Covid-19) in order to raise profile and attract a strategic investor.