Nanalysis Scientific is undervalued, says Echelon

Echelon Capital Markets analyst Stefan Quenneville lowered his target on Nanalysis Scientific (Nanalysis Scientific Stock Quote, Charts, News, Analysts, Financials TSXV:NSCI) in a Monday report to clients, but the stock remains a “Buy” and one that’s currently undervalued by the market, according to Quenneville.

Calgary-based Nanalysis makes portable nuclear magnetic resonance (NMR) spectrometers and magnetic resonance imaging equipment for a number of industries including pharmaceutical, biotech and security and has monitoring, analysis and support services for its NMR technologies.

The company announced on Friday its intention to complete a $3.5 million non-borkered private placement to support its balance sheet and provide working capital for the roll-out of its $160 million CATSA Airport service contract.

“We are building a fully vertically integrated scientific instrumentation company,” said CEO and founder Sean Krakiwsky in a press release. “This vision includes a scaled-up service organization, and the CATSA contract accelerates that aspect of our vision. In addition, this opportunity will increase our base revenue, move us towards profitability, and eventually we will marry that business unit with our benchtop NMR, high field NMR, and MRI business, which all increasingly require a revenue generating service organization.”

Quenneville said the timing of the financing signals that the CATSA contract has hit a speed bump but that the need for extra working capital is not surprising given the size and scope of the contract. He said Nanalysis plans on increasing its headcount by 120 people and providing training and security clearance for staff, with the phasing in of operations ultimately across 80 airports in Canada. 

Quenneville said it’s likely that management’s original timeline — which had the contract reaching a $2 million per month run-rate with positive cash flow by mid-2023 — has slipped a bit. The result is a more conservative forecast from the analyst, who is now calling for NSCI to reach 2023 revenue of $45.6 million (previously $50.9 million) and EBITDA of negative $0.4 million (previously positive $8.5 million).

“Given the timing of the announcement, we believe it signals that the roll-out is progressing more slowly than initially planned and we are therefore trimming our estimates for the next several quarters,” Quenneville wrote. 

“Based on the dilution from the deal as well as our lowered estimates and reduced peer multiples, we are decreasing our price target to $1.90/shr (from $2.75/shr). Nevertheless, we are maintaining our Buy rating as the Company’s impressive longer-term growth trajectory remains intact and the stock price remains significantly undervalued compared to its peers,” he said.

Nanalysis Scientific’s share price reached a high of about $1.60 in November 2021 but the stock has fallen over the past two years and has recently been trading around the $0.60 mark. At the time of publication, Quenneville’s new $1.90 target price represented a projected one-year return of 217 per cent.