Hamilton Thorne is undervalued, says Beacon Securities in coverage launch

Hamilton Thorne (Hamilton Thorne Stock Quote, Chart, News: TSXV:HTL) is well-positioned to benefit from the growth in In-Vitro Fertilization (IVF) clinics worldwide, making its stock a cheap pickup, says Beacon Securities analyst Doug Cooper, who has initiated coverage of the company with a “Buy” rating and a $1.40 target price.

A manufacturer of precision laser devices and imaging systems, Hamilton Thorne recently reported a 109 per cent uptick in revenue over 2017 to over $22 million with an adjusted EBITDA of $4.9 million, representing a 168 per cent increase. That growth was spurred by an expansion in its product line, worldwide coverage and key acquisitions, all of which could serve the company well going forward in a growing field, says Cooper.

“Globally, there are now about 4,500 IVF clinics performing about 2 million cycles per year with accelerating success rates,” says the analyst in a letter to clients on February 13. “The industry is growing at ~10%/year given favourable demographic trends (i.e., women delaying childbirth, growing global middle class who can afford the procedure) and favourable re-imbursement trends.”

Cooper says that Hamilton’s acquisitions over the past 18 months — Gynemed, a maker of consumables for IVF clinics, and Embryotech, a quality control provider — will add significantly to the company’s recurring revenue stream.

“With this deeper product portfolio (capital equipment, consumables, QC) and geographic presence, the company is in the process of transitioning from a sales-through-distribution model (~80% of sales today) to one driven by a direct sales force, except in AsiaPac where sales will continue to go through distribution,” says the analyst. “Such a strategy has the potential to expand gross and EBITDA margins as distributors typically garner between 20-30% margins albeit HTL will have to hire more sales people thus increasing overhead.”

Cooper’s estimates for FY18 and FY19 call for a 5 per cent per year increase in the number of clinics that Hamilton services, along with growing revenue per clinic.

“From a margin perspective, we believe gross margins over our projection period will fall slightly, from 60% to 57% as the higher-end lasers account for a declining percentage of overall revenue,” says the analyst. “However, EBITDA margins should expand through operating leverage.”

Cooper forecasts a FY18E adjusted EBITDA of $5.6 million based on revenue of $27 million and a FY19E adjusted EBITDA of $6.3 million based on revenue of $29.9 million. Based on 20x the FY19 EBITDA estimate, Cooper’s “Buy” rating comes with a $1.40 12-month target price, representing a potential return of 69 per cent as of publication date.