Nanosonics (ASX: NAN) 2021 AGM Update

On Friday, infection prevention control company Nanosonics gave its AGM presentation, which is one of the more worthwhile AGMs to attend. The company stands out for its professional and inclusive shareholder interaction, with each director up for re-election giving a short speech explaining their history with the company, and the value they add to it.

We’ve already covered the Nanosonics 2021 Full Year Results here, so I won’t go over them again.

The Chairman Maurie Stang gave a speech outlining his continued optimism for the company and his excitement about the new manufacturing facility they are building, which will allow the company to increase manufacturing capacity. This will no doubt be important as the company moves ahead with its plans to commercialise CORIS, its new technology for sterilising flexible endoscopes.

Meanwhile, the Nanosonics CEO Michael Kavanagh noted that a “Return to pre covid growth momentum levels was definitely experienced”.

What is Nanosonics Guidance for FY 2022?

As part of the AGM presentation, Nanosonics disclosed that they are expecting double digit revenue growth in FY 2022. Importantly, they expect gross margin to drop from 78% to 75% as a result of a higher proportion of revenue coming from the lower margin capital sales. Presumably, this is partly because they are placing more focus on the opportunity to replace (and upgrade) the ~6,500 trophon EPR units that are at least 7 years old (and therefore due for replacement).

Moving to expenses, the company is guiding for around $90m in operating expenses.

Now, the total revenue for FY 2021 was $103 million, and the second half revenue was about $60 million, so I think a conservative guess for FY 2022 would be about $120m, with analyst consensus estimates (per Cap IQ) sitting at about $132 million. Using my conservative estimate, we can apply a 75% gross margin to get gross profit of $90m, which neatly matches the operating expenditure guidance of $90 million.

The purpose of this conservative estimate is to basically argue that, even in the worst reasonably likely scenario, Nanosonics still makes a small profit in FY 2022 (while it grows the top line.)

Ultimately, that is the kind of company Nanosonics is. At this stage in its development it seems to be fairly relentless on not worrying about profit, but assiduously avoiding losses. This allows it to plow all its free cash flow into generating new revenue streams, and with both Coris and Audit Pro recently announced, there’s good reason to believe that the company is making progress on that front.

Does Nanosonics Need To Worry About Its Patent Risk?

From time to time, Nanosonics becomes a heavily shorted stock. It’s never really clear why that is. It could be because analysts often project ever-growing profits, but the company is actually focussed on revenue, so shorts are just betting that the company misses profit estimates.

However, one of the risks that often comes to mind when I think about why people are shorting Nanosonics is that patent expiry dates might open it up to more competition. So I asked the company a question about that, at the AGM.

In response, the CEO said that:

“The majority of the relevant patents that we have across the trophon technology and the consumables go out to about 2031 so there is still quite a period of time before patent expiry so we are quite well protected but in that time period as well where there is a body of work where we expect to put out new patents to protect the trophon system.”

And the chairman added that the company does have substantial in-house IP law expertise to help manage the patent portfolio.

Overall, I’m satisfied that patent expiry dates probably aren’t a big risk for the company (though of course competition more generally remains a significant risk).

Conclusions From The 2021 Nanosonics AGM

Overall, this AGM didn’t change my view of the company which is that it is a good quality business (razor + blade model) in a defensive industry run by honest and competent management. While the fact that it is not focussed on profits means that it is still high risk, I continue to be a content holder of the stock and while I might adjust my position size as events unfold, I anticipate continuing to remain a long term shareholder of Nanosonics.

Please remember that these are personal reflections about a stock by author. I own shares in Nanosonics at the time of writing, and will not sell them for at least 2 business days after publication. This article should not form the basis of an investment decision. It is an investment diary valuable only for the cognitive process it demonstrates. We do not provide financial advice, and any commentary is general in nature. Please read our disclaimer.

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