TSO3 gets price target cut at Echelon Wealth Partners, maintains “Buy”

New developments at TSO3 (TSX:TOS) have Echelon Wealth Partners analyst Doug Loe cutting his target on the medical device maker, though he thinks the stock is still a buy.

On Wednesday, TOS announced that it and Getinge Infection Control AB mutually decided not to renew the distribution agreements between the parties and that TSO3 would have unrestricted independent commercialization of its Sterizone VP4 sterilizers. The company concurrently announced a (US) $20-million debt financing to begin to commercialize the product and said it would purchase remaining inventory from Getinge.

Loe says as a long-time follower of the company he approves of this development, as TOS simply wasn’t getting much from the arrangement.

“We endorse TSO3s decision to explore independent VP4 marketing option, with legacy partnership performance providing insufficient evidence for sustaining relationship,” the analyst says. “Getinge is certainly a major global player in the broad-based infection control industry, but we do not hold the firm’s contributions to TSO3’s VP4 sales activities in high regard and long ago we would have held the door open ourselves to allow Getinge to exit TSO3’s commercial orb. As today’s press release indicates, the firm still had 220 VP4 systems in inventory (we estimate that about 289 VP4s were shipped to Getinge from FQ415-FQ417) and another ten VP4s will be added to a consolidated repurchase of 230 VP4 units by TSO3, systems that TSO3 itself will be able to sell directly to US/EU-based hospitals with its own sales team.”

Loe says he is now modeling topline revenue of (US) $150,000 per unit from each device for TOS instead of the $110,000 under the Getinge deal, but cautions that the company’s marketing expenses are likely to escalate as well.

In a research update to clients today, Loe maintained his “Buy” rating on TSO3, but cut his one-year price target from $2.50 to $1.80, implying a still-healthy return of 157 per cent at the time of publication.

The analyst’s revised forecast has TOS generating EBITDA of negative $13.6-million on revenue of $9.0-million in fiscal 2018. He expects those numbers will improve to EBITDA of positive $1.1-million on a topline of $33.5-million the following year.

Loe says part of the reason for his price target cut is balance sheet uncertainty, with TOS having new debt for the first time during his coverage history.

“With TOS shares trading at or near current price level of C$0.70-C$0.75 in recent trading sessions, the firm’s cost of capital on any financial transaction was destined to be high regardless of which financial instruments were selected to support it, and so we are not overly surprised that new Courage debt incurs a fairly aggressive interest rate, contributing US$2.1M in new annual interest expense and compressing our revised net income forecasts by that magnitude, and our fd EPS forecasts by US$0.02,” the analyst adds.