Nanalysis Scientific has a huge upside, says Echelon 

Good-looking quarterly numbers are keeping Echelon Capital Markets analyst Stefan Quenneville upbeat about Canadian medical equipment company Nanalysis Scientific (Nanalysis Scientific Stock Quote, Charts, News, Analysis, Financials TSXV:NSCI).  Quenneville delivered an update to clients on NSCI on Thursday where he reiterated a “Buy” rating on the stock and $2.75 per share target price, saying Nanalysis is back on track after a tough second quarter.

Calgary-based Nanalysis released preliminary third quarter 2022 numbers on Thursday, showing $6.8 million in revenue, which would imply a year-over-year increase of over 100 per cent. That comes after a second quarter where NSCI managed a topline of $5.2 million, up a smaller 19 per cent.

After the company’s Q2, management commented that a lot of its time and energy over the quarter were spent closing on the $160 million multi-year contract with the Canadian Air Transportation Security Authority (CATSA) contract, while operational challenges related to scaling its NMR spectroscopy sales team were also a factor. But the company says those issues are now behind it. Additionally, Nanalysis reported that the CATSA contract is progressing well and that it expects to go live in Alberta on November 1, 2022.

“We have seen a strong return to our growth trajectory in our core NMR business,” said Sean Krakiwsky, Founder and CEO, in an October 20 press release. “We believe we have overcome the issues that limited our growth in the second quarter and have resumed progress with our new sales initiatives.”

“Additionally, we continue the expedited phase-in portion of the CATSA service contract which we expect to have material billings in the fourth quarter and will continue to ramp to the full run rate into 2023. Overall, we continue to invest in our strategic initiatives while managing our cash resources diligently,” Krakiwsky said.

Commenting on the preliminary numbers, Quenneville said the Q3 $6.8 million topline would be ahead of his estimate at $6.6 million and it would mark a return to Nanalysis’ historical growth trend following the second quarter bump in the road.

“With its impressive longer-term growth trajectory intact, we continue to view Nanalysis as meaningfully undervalued relative to peers, especially given the recent stock price decline and confidence inspiring Q322 recovery,” Quenneville wrote.

The analyst noted that Nanalysis reported shipping a record 20 100 MHz NMR instruments in the third quarter, which would be in line with the midpoint of its Q2 2022 guidance and well above its previous record of 13. The result shows that sales operations have clearly rebounded, Quenneville said. 

On the CATSA update, Quenneville said, “We are pleased that the phase-in is moving swiftly after the Q222 disruptions and remain confident that the CATSA contract will reach a ~$2 million/month revenue run rate and become cash-flow positive by mid-2023.”

At the same time, Quenneville spoke of Nanalysis’ Quad Systems segment, whose full product launch has been delayed, with revenues now expected to begin in 2023. That has caused the analyst to temper his fourth quarter revenue estimate for NSCI from $11.7 million to $10.0 million while maintaining a $51 million topline forecast for 2023.

Altogether, Quenneville is calling for full 2022 revenue of $27.6 million compared to $16.0 million achieved in 2021 and EBITDA of $1.0 million compared to EBITDA of $1.9 million in 2021. For 2023, he is estimating revenue of $50.9 million and EBITDA of $11.5 million.

On valuation, Quenneville is pegging NSCI’s EV/Sales at 3.7x for 2021’s numbers, 2.2x for 2022 and 1.2x for 2023. For the EV/EBITDA multiple, the estimate is 5.9x for 2021, 5.4x for 2022 and 5.1x for 2023.

On a comps basis, Quenneville said Nanalysis Scientific is undervalued.

“We continue to view Nanalysis as meaningfully undervalued, trading at 1.2x 2023 EV/Sales versus peers at 5.1x. As such, we are maintaining our Buy rating on NSCI along with our $2.75/share price target, which is derived using a valuation multiple of 5.5x 2023 EV/Sales, consistent with where its broader Scientific Instrument peer group typically trades,” Quenneville wrote.

At the time of publication, Quenneville’s $2.75 target represented a projected one-year return of 293 per cent.

Nanalysis’ share price had a huge run-up over the latter half of 2021, where the stock went from $0.50 in late June to as high as $1.69 by mid-November. NSCI has been on a gradual decline since then, however, and is currently back to around $0.70 per share. Year-to-date, the stock is down about 54 per cent.