Investors should be buying TSO3, says Canaccord Genuity

Following TSO3’s (TSO3 Stock Quote, Chart, News: TSX:TOS) fourth quarter results, Canaccord Genuity analyst Neil Maruoka says he still thinks the stock is very undervalued.

Yesterday, TSO3 reported its fourth quarter and fiscal 2016 results. In the fourth quarter, the company lost (All numbers in U.S. figures) $2.06-million on revenue of $3.75-million, a number that compared favourably to last year’s Q4 topline of $150,000.

“We are pleased with TSO3’s strong finish to 2016. In the fourth quarter of 2016 we reached important operational milestones, added strategic key personnel, and made substantial improvement in revenues and gross margins,” said CEO R.M. (Ric) Rumble. “We continue to invest in our team and our game-changing technology as we look to transform how low-temperature sterilization and endoscope reprocessing is performed in health care. Looking ahead into 2017, we will continue to support Getinge in North America, Europe and other international markets, conduct comprehensive sales training meetings, and provide marketing collateral support. Two thousand seventeen will also see us expand upon the use of our existing laboratories in Quebec and South Carolina in an effort to further support device compatibility testing, pursue expanded regulatory claims for duodenoscopes in the United States, and new product development.”

Maruoka notes that the quarter was essentially in-line with both his and the street’s expectations. The analyst says he sees progress being made at TSO3.

“As expected, we believe these results show incremental progress for the launch of VP4 (which remains in its infancy) and that customer installations have yet to hit an inflection point,” he says. “However, with the potential for additional FDA claims, the start of the European launch, and ‘accelerating’ installations of VP4 in the US, we believe an inflection for sales is approaching. We believe that VP4 has the potential to dominate the low-temperature sterilizer market; for those with a two- to three-year time horizon, we believe that fundamentals remain intact and we continue to recommend investors accumulate the stock at these levels.”

In a research update to clients Monday, Maruoka maintained his “Buy” rating and one-year price target of $5.25 on TSO3, implying a return of 90.9 per cent at the time of publication.

Maruoka thinks TSO3 will generate EBITDA of $600,000 on revenue of $25.8-million in fiscal 2017. He expects these numbers will improve to EBITDA of $14.5-million on a topline of $62.8-million the following year.

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