Downgrade to hold on valuation, reckon the low hanging fruit is picked.
No Further Upgrades
Nanosonics has enjoyed a stellar run in its share price in recent months. The stock has appreciated by 53% since we initiated coverage in May, inclusive of a 28% appreciation since the full year result in mid August 2016. The FY16 result met market expectation for revenue and earnings growth. The company achieved unit sales of 1,000 units per quarter during FY16 and has indicated this level of selling activity will continue at least in the short term.
There are now approximately 9,000 Trophon units in the US, which is estimated to be a 50,000 unit market. The lowest hanging fruit is now likely to have been consumed, hence it is reasonable to expect a cap in the quarterly growth rates at current levels. The Trophon is not a mass market product and the vast majority of revenues are derived from one market being the USA, hence it is unreasonable to expect further acceleration in revenues from this point. In our view the next group of buyers for the Trophon will be additional deployments into existing hospital clients.
The next major catalyst for the stock will be the release of NHS guidelines in England which we expect will strongly recommend the use of High Level Disinfection for ultrasound probes between patients. We estimate the UK market at between 4,000 and 6,000 units and we expect some penetration into NHS hospitals in 2H17.
We continue to believe the Trophon is a ground breaking product setting the standard for high level disinfection at the point of care. NAN continues to execute is sales strategy in US well, however the rest of world opportunity will take time, hence there is no cause to expect further upgrades to forecast revenues at this time. The company continues to focus its marketing efforts on the US market where we expect it will attain the highest return for shareholders.
Recommendation Reduced from Buy to Hold
Price target remains unchanged at $3.21. There are no changes to earnings. On a two year basis, the stock now looks fully priced, hence we reduce the recommendation from Buy to Hold.
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