Nanotech Security is still undervalued, says Cantor Fitzgerald Canada

After a fourth quarter of mixed results, Cantor Fitzgerald Canada analyst Ralph Garcea is still feeling optimistic about Nanotech Security (Nanotech Security Stock Quote, Chart, News: TSXV:NTS).

On Monday, Nanotech reported its fourth quarter and fiscal 2016 results. In the fourth quarter, the company lost $1.67-million on revenue of $1.51-million.

“Two thousand sixteen has been another successful year for the company,” said CEO Doug Blakeway. “We have now secured customer relationships with several of the world’s largest banknote-issuing authorities and are well positioned to develop significant business with each of them in the years ahead. Although we did not anticipate the OTF production delays with our Asian customer, we continue to make progress. All parties remain confident we will be successful, and once the production resumes, the company will be well positioned to deliver throughout the life of this banknote.”

Garcea notes that although Nanotech’s revenue was below his expectation of $1.9-million, and its earnings and EBITDA also fell slightly short of his mark. But the analyst says the company’s gross margin of 69 per cent was a real surprise, as he had modeled 52 per cent. He sees better things on the horizon for Nanotech.

“It is anticipated that NTS will start volume production on its large banknote order in the near term,” says Garcea. “We look for banknotes to drive revenue in the near-term, and tax stamps, tickets, pharma and cosmetics to drive revenue in the medium-to-long-term. NTS is progressing well in diversifying the business into new verticals – specifically tax stamps, tickets and pharma. The Company noted there are 140B tax stamps produced annually and NTS has moved into the contractual phase with customers after providing working designs. Regarding pharma, NTS has also provided samples for pharma and packaging companies, and is making headway in this vertical as well. These new revenues would materialise at the end of F2017 / start of F2018”

In a research update to clients Tuesday, Garcea maintained his “Buy” rating and one-year price target of $2.50 on Nanotech Security, implying a return of 67 per cent at the time of publication.

Garcea thinks Nanotech will post EBITDA of $800,000 on revenue of $10-million in fiscal 2017. He expects these numbers will improve to EBITDA of $4.4-million on a topline of $17.3-million the following year.