More M&A for Nanalysis Scientific, Research Capital reports

Yue (Toby) Ma of Research Capital Corporation is positively drawn to Nanalysis Scientific Corp. (Nanalysis Stock Quote, Chart, News TSXV:NSCI), maintaining a “Speculative Buy” rating and target price of $2.20/share for an implied return of 67 per cent in an update to clients on Tuesday.

Established in 2009 and headquartered in Calgary, Nanalysis Scientific is a vertically integrated global scientific instrument manufacturer that develops and markets proprietary benchtop nuclear magnetic resonance (NMR) systems and magnetic resonance imaging (MRI) consoles, as well as providing software solutions in multiple markets including food, pharma/biotech, chemical, academic research, security/forensics, petroleum and education.

Ma’s latest analysis comes after the company announced it has entered into a LOI to acquire QUAD Systems, a Zurich-based tech company developing and commercializing magnets, probes and consoles for high-field NMR.

Ma noted that the acquisition is effectively an extension on the existing partnership between the two companies, in which Nanalysis subsidiary RS2D supplies its proprietary electronic board technology and associated software solutions to QUAD.

“There are a number of key reasons why NSCI has decided to convert the partnership into an acquisition,” Ma said. “Creating cross-selling opportunities – since over 80 per cent of NSCI’s customers use both compact and conventional (i.e. high-field) NMR equipment, QUAD’s products can be directly marketed to NSCI’s existing customers; achieving critical mass and economies of scale – the merger of the two companies should make NSCI more competitive in gaining global market share in NMR; and diversifying and increasing NSCI’s total revenues.”

Under the terms of the agreement, Nanalysis has provided QUAD with a CHF 1 million loan – which is convertible into QUAD shares, though the terms have not yet been released. In addition, Nanalysis is to buy 260,000 QUAD shares initially for CHF 6.5 million in cash to give Nanalysis 43 per cent stake in the company; meanwhile, Nanalysis has an option to acquire all remaining QUAD shares at a pre-set valuation in a combination of cash and Nanalysis shares through Juy 1, 2023.

“We have had roughly 10 of our scientists and engineers embedded with Quad Systems for over a year, and a tremendous amount of collaboration and mutual respect has developed,” said Sean Krakiwsky, founder and Chief Executive Officer of Nanalysis in the company’s January 18 press release. “Recently, Klemens (Dr. Kessler, founder of QUAD Systems) and I came to the conclusion that joining forces made both companies stronger, would optimize our success regarding several critical challenges, and steepen our growth trajectories: We are growing the large untapped market for miniaturized NMR, while they are focused on taking part of the established market.”

While waiting for clarity on QUAD’s financial picture, Ma has decided to leave his financial projections intact, projecting overall revenue of $14.8 million to complete the 2021 fiscal year, implying year-over-year growth of 87.3 per cent. From there, Ma projects a spike to $31.1 million in revenue for 2022 for a potential year-over-year increase of 110.1 per cent before the growth trajectory slows down, eventually getting to a projected $48.7 million in 2025 for an implied year-over-year increase of 12 per cent.

Accordingly, Ma’s P/Sales multiple projection is also set to improve in that time, dropping from a projected 7.1x in 2021 to 3.4x in 2022, then continuing to drop through 2025, which is projected to have a multiple of 2.2x.

Ma is calling for similar growth in the company’s gross profit beginning in 2022 at $18.7 million and with eventual growth to a projected $29.2 million in 2025, maintaining a gross margin of 60 per cent across the board in that time.

Ma projects similar increases across the board, projecting net income to turn positive in 2022 at a projected $1.8 million after a projected $1.5 million loss in 2021, paired with a gradual increase to $6.5 million by 2025.

Meanwhile, a look at a pro forma income statement shows Ma’s belief that the company’s EBT will turn positive in 2022 at a projected $1.8 million after years of losses, then projecting a growth curve that reaches $8.9 million in EBT by 2025.

Overall, Ma views the announced transaction as being positive for Nanalysis.

“NSCI is becoming a global leader in magnetic resonance instrument market through organic sales growth and acquisitions of complementary assets,” Ma said. “Since mid 2021, NSCI has acquired two companies – One Moon Scientific (to expand magnetic resonance software offerings) and KPrime (to strengthen sales capacity). We would not be surprised to see NSCI continue acquiring additional assets (potentially incl. vendors of NSCI’s current products, as well as, product manufacturers in industrial analysis and MRI imaging).”

Nanalysis has proven to be a boon for investors over the last 12 months, producing a return of 143.4 per cent in that time, with momentum really beginning at the end of May and hitting a 52-week high of $1.69/share on November 11.