Nanalysis Scientific is undervalued, says Echelon

The stock is still looking good but new quarterly results from healthcare tech company Nanalysis Scientific (Nanalysis Scientific Stock Quote, Charts, News, Analysts, Financials TSXV:NSCI) have Echelon Capital Markets analyst Stefan Quenneville lowering his 12-month target price in a Thursday update on the company. Quenneville said NSCI’s high growth rate puts the stock at an attractive discount to its peer group.

Calgary-based Nanalysis, which develops and manufactures compact nuclear magnetic resonance (NMR) spectrometers and magnetic resonance imaging equipment for a number of industries including pharma and biotech, chemical, security, food, materials and education, released its second quarter 2022 financials on Thursday, featuring revenue up 19 per cent year-over-year to $5.2 million but down seven per cent sequentially. Gross margins were 62 per cent compared to 67 per cent a year ago and the company’s net loss was $2.5 million compared to net income of $222,000 a year earlier.

It was a notable quarter for Nanalysis, which announced a $160 million six-year service and maintenance contract with the Canadian Air Transportation Security Authority (CATSA) awarded to the company’s wholly-owned subsidiary K’(Prime) Technologies. Management chalked up the lower sequential revenue to a restructuring of its internal sales force which is being integrated with the K’(Prime) sales team and leadership, which effectively resulted in turnover and disruption of the sales force. Management also acknowledged that winning the CATSA contract took some of its focus away from promoting their benchtop NMR business.

“We continue to record substantial year-over-year revenue growth,” said Sean Krakiwsky, Founder and CEO of Nanalysis, in a press release. “With that being said, we are not satisfied with our Q2 revenue results and a lot of focus is being given to regain our previous trajectory.

“In the second quarter a lot of time, focus, and resources were given to closing the $160 million CATSA contract, which we did on May 25th. Additionally, we underestimated certain operational challenges associated with scaling our benchtop NMR sales organization which impacted our Q2 revenue. We have redoubled our efforts in this area, which is going well, as are other important areas of our business, and are seeing improvements in the current quarter,” he said.

Management also said there’ll be more efforts at restructuring and refocusing the company’s benchtop NMR salesforce up ahead, with a launch of its full multi-module high-field NMR product as well as the rollout of coverage across Canada’s airports via the CATSA contract.

“Operational excellence still remains our most important mantra, as we will continue to leverage existing customer relationships, along with our technologies, to fuel growth. So, the rest of 2022 is about consolidation, execution and capitalizing on synergies. We are confident that we will deliver the value we’ve created by our recent acquisitions to our shareholders,” Krakiwsky said.

Looking at the Q2 results, Quenneville summed them up as “disappointing,” in that revenue of $5.2 million was a significant miss of his estimate at $7.3 million and benchtop NMR instrument sales declined by 10.5 per cent year-over-year to $2.9 million. The EBITDA loss for the quarter of $0.9 million was also under Quenneville’s positive $0.9 million forecast and EPS of negative $0.02 per share was below the analyst’s call at $0.00 per share.

At the same time, Quenneville said the outlook for the second half of the year remains strong, with management projecting to ship between 18 and 22 MHz Benchtop systems in the third quarter, with a current backlog of 19 units. Nanalysis said the upgrades to its manufacturing facility in recent quarters means it remains on track to be producing ten 100 MHz units per month by the fourth quarter. 

With his update, Quenneville has adjusted his forecast for the company, tempering the picture for the rest of 2022. The analyst is now calling for full 2022 revenue of $29.1 million compared to $16.0 million and running to $50.9 million for 2023. On EBITDA, Quenneville is expecting $1.4 million for 2022 compared to $1.9 million for 2021 and moving to $11.5 million for 2023.

On valuation, he is putting NSCI at an EV/Sales multiple of 3.2x for 2022 compared to 5.7x for 2021 and heading to 1.8x for 2023. On EV/EBITDA, the multiple goes from 48.2x in 2021 to 67.6x for 2022 to 8.0x for 2023.

With the update, Quenneville has maintained a “Buy” rating on NSCI while lowering his target from $3.25 to $2.75 per share, which at the time of publication represented a projected one-year return of 175 per cent.

“While the Company expects a strong 2H and has good visibility into 2023 given its recent $160 million six-year maintenance contract win with CATSA, we are trimming our near-term growth outlook and consequently lowering our price target to $2.75. Nevertheless, we continue to view Nanalysis as meaningfully undervalued relative to peers given its still impressive growth trajectory and view any potential weakness in the stock as a buying opportunity,” Quenneville wrote.

“We now use a 5.5x EV multiple on our 2023 sales estimate of $50.9M (75 per cent year-over-year growth). This is in line with the Company’s broader scientific and industrial tools peers despite its much higher expected growth,” he said.

Nanalysis Scientific had a big run-up over the second half of 2021 where the stock went from about $0.50 to over $1.50 per share, but ensuing months have seen a pullback. NSCI is currently trading in the $0.90-$1.00 range.