Why Compumedics (ASX: CMP) May Be At An Inflection Point

Founded in 1987, Compumedics (ASX: CMP) is a medical device company specialising in diagnostics technology for sleep, brain, and ultrasonic blood flow monitoring applications.

The visionary behind it all, Dr. David Burton, remains the CEO and Executive Chairman. 36 years into the gig, he certainly would be getting some good sleep to maintain the motivation to run the company. 

Operating through subsidiaries ( Neuroscan in the US and DWL Elektronishe GmbH in Germany), Compumedics sells their devices in the Americas, Australia and Asia Pacific, Europe, and the Middle East.

They listed on the ASX in 2000, accumulating a history of awards, including Australia’s Exporter of the Year, and recognition as a Top 100 Innovator by German and Australian Governments.

However, for all its awards, the one thing they haven’t managed to do is deliver a good outcome for shareholders. The share price was 35.5 cents on 31 December 2003, and today sits at 42.5 cents, even after rocketing around 50% on the back of its December Business Update.

So why should this company interest us now?

Put simply, Compumedics released a series of announcements that have had a tangible impact on the share price. It is possible — though not certain — that the company is at an inflection point.

Editors note: To give JP (the author of this article) his credit, he pitched this article to me when the stock was under 30c per share, so it is my fault you’re reading this after a 50% share price rise and not before it — Claude.

Somfit Cleared for Selling in the USA

The first announcement, released on the 4th of December, shared that Somfit® had obtained FDA clearance for USA marketing. Compumedics is targeting a more substantial market in the US with a potential they judge to be ranging from USD 110 million to 180 million. They tell us their aim is to capture 10% to 30% of this market within the next 24 months.

I’m generally wary of putting too much weight on market capture projections. While they inherently carry an element of risk, Compumedics’ track record in Australia lends weight to their forecasts (they claim 75% of the market share by their estimates).

Some elements of risk with this good news remains; the classic U.S. market entry move is paved by the graveyard of companies with unrealised American dreams. We’ll need more time to gauge properly if their estimates can hold true. 

If we were to apply their conservative scenario, capturing 10% would translate to approximately $16.6 million AUD (using the current conversion rate of 1.52) over the next 2 years. Realistically, the current year might serve as a ramp-up period for onboarding and building the sales pipeline, with revenue projections at around $4 million. Anticipating a more robust performance next year, with an estimated $12 million in revenue.

I think the key takeaway here is that even conservative estimates could impact the top line nicely. With Somfit’s SaaS (Software as a Service) licensing model, there’s optimism for appealing gross margins, promising a positive influence on the bottom line as well. 

Expanding their Brain Imaging Segment: 2 more MEGs sold to China 

The second announcement, released on the 12th of December, shared that following the sale of their MEG system to China’s Tianjin Normal University, Compumedics had secured two additional MEG sales orders from China. These orders have a combined value exceeding USD 6 million (AUD 9.3 million), and the company anticipates shipping and installing them FY25.

These big, tunnel-like devices play a pivotal role in brain imaging science. Specifically, they represent a good stride for CMP towards commercialising more magnetoencephalography (MEG) machines. These machines scan brain activity at a speed that surpasses traditional MRI machines.

While the financial figures are exact, interpreting their immediate impact on the company proves to be a complicated task. The recent deployment of the first unit means we have no reporting season yet shedding light on its influence on the bottom line.

For more clarity here, we’ll have to wait on the half yearly reporting to see the impact on the bottom line. 

At most, I think this serves as a good proof point that the early clients are happy with the solution, and that there’s a market there for them to grow into in the future. 

December Business Update

Last week Compumedics announced that revenue for H1 FY 2024 would be up 35% to $26m with record sales orders boding well for H2. Furthermore, the company said it would return to profitability in FY 2024 and that it would update its guidance at the release of the H1 FY 2024 results.

An Estimate Of The Compumedics FY 2024 P/E Ratio

FY23 results saw Compumedic land on revenue of $42.4M and a loss of $6.7M. EBITDA for FY23 was a loss of $2.0m, compared to a profit of $2.8m for FY22. The reason for the big loss declared in FY23 were mostly associated with write downs and provisioning for assets relating to the MEG business. The impact was reported in the first half, and the business told us they had returned to profitability in the second half, recording an EBITDA profit of $2.8m. 

As part of the first announcement on the 4th of December, the company re-highlighted their guidance for FY24, which is for revenues surpassing $44 million and EBITDA exceeding $5 million.

If they land exactly on the guidance and don’t ‘surpass’ it, this would mean 3.7% growth and the top line, and taking H2’s run rate of EBITDA profitability, a decline of 12% on the bottom line. 

That’s hardly inspiring. I think there’s a possibility that the company is intentionally adopting a conservative stance with the intention to overdeliver. This is all the more likely given the strong December business update.

A noteworthy insight from a November presentation for the Bell Potter Healthcare Conference, released to market on 16th of November 2023, indicated promising early indicators for FY24. The company highlighted a 23% increase in Q1 FY24 sales orders compared to the same period the previous year, driven by robust growth in Australia due to the initial commercialization of Somfit. Excluding the MEG sale of $4.7 million, they mention Q1 FY24 invoiced revenues were 40% higher than the same period the previous year. 

These statements suggest the potential for substantial growth in the coming year, contingent on the sustained momentum. 

Based on historical results, Compumedics can achieve a NPAT margin of at least 5% in a good year, if not higher. Based on the first half of FY 2024, the company is tracking to revenue of around $52m. At a 5% NPAT margin this would correspond to $2.6 million. At the current share price of $0.425, Compumedics has a market capitalisation of about $75 million, putting it on a notional P/E ratio of around 28. It has net debt of around $3.5m. I will let readers make their own decisions about whether that is cheap or not.

The bigger point I want to make is that the company might be at an inflection point in its earnings. Of course, there have been false dawns before and as a small-cap investor I know there are no guarantees of growth. To be fair I also own the first of these 2 micro-caps that Claude thinks is undervalued, and it is almost certainly trading at a lower P/E Ratio in the short term.

Disclosure: The author of this article Jean-Philippe Picard owns shares in CMP. The editor Claude Walker does not own shares in CMP. Neither will trade CMP shares for at least 2 days following the publication of this article. This article is not intended to form the basis of an investment decision and is not a recommendation. Any statements that are advice under the law are general advice only. The author has not considered your investment objectives or personal situation. Any advice is authorised by Claude Walker (AR 1297632), Authorised Representative of Equity Story Pty Ltd (ABN 94 127 714 998) (AFSL 343937).