Nanalysis Scientific Corp. (NSCI:TSX.V; NSCIF:OTC; 1N1:FSE) caught the attention of Leede Financial Inc. which initiated research coverage on it with a Speculative Buy rating and a CA$0.90 per share price target, reported Leede Managing Director & Analyst Douglas Loe in a Nov. 25 research note.
Nanalysis is a medical and chemical instrumentation developer mainly focused on low-field benchtop nuclear magnetic resonance (NMR) systems but also expanding its technical capabilities.
150% Return Projected
The Canada-headquartered biotech was trading at the time of the report at about CA$0.36 per share, at a discount, according to Loe.
He wrote, "Given the firm's revenue growth trajectory, substantial margin profile as well as being an industry incumbent within an industry guarded by high barriers to entry, we believe implied forward valuations are undervaluing Nanalysis shares."
With Leede's CA$0.90 per share target and Nanalysis' current CA$0.36 share price, the implied potential return for investors is 150%.
Loe discussed the components that make Nanalysis, expanding through organic growth and bolt-on acquisitions, a potentially attractive investment.
Primary Line of Business
Nanalysis has two business segments. One, the core of its value proposition to customers and shareholders, is manufacturing and selling the company's patented flagship low-field benchtop NMR platforms. Branded as 60e, 100e, 60Pro, and 100Pro, these instruments comprise two product lines, each targeting different end users.
According to Nanalysis, the global scientific instrument market was estimated to be US$75 billion (US$75B) in value in 2020, and the total addressable market was an estimated US$3B, Loe relayed. Making up nearly half of the market are academia, pharma and biotechnology, all prospective buyers of Nanalysis' benchtop NMR spectrometers.
Further, as it did with its NMR products, Nanalysis is applying miniaturization technology to the development of portable magnetic resonance imaging solutions. Through its acquired RS2D subsidiary, a manufacturer of electronics components for precision analytical instruments, Nanalysis sells a compact MRI console with several modular solutions that allow for a plug-and-play approach.
Another related Nanalysis acquisition, One Moon Scientific, is a software company specializing in magnetic resonance data analysis and management. Over time, this subsidiary, Loe purported, should generate recurring revenue from software and related services.
"High-field NMR spectrometry and MRI are actively being contemplated as next-generation platforms for the firm," noted Loe, and thus provide revenue upside.
Nanalysis has at least five granted international patents, with another three pending in the U.S., mostly relating to its miniaturization development process for NMR.
Leede expects Nanalysis' capital equipment sales to reach CA$19.9 million (CA$19.9M) in 2024, up from CA$16.3M last year, and to hit CA$21.1M in 2025.
"We believe that growth to this level is achievable based on industry trends," noted Loe, "including documented utility of lower-field NMR for analytical and structural determination in both academic and industrial settings."
Second Business Segment
Nanalysis' other line of business is equipment security services, Loe explained. The company has a six-year equipment services contract with the Canadian Air Transport Security Authority (CATSA) that could generate up to CA$160M cumulatively, and could be renewed for two more five-year periods. The contract is expected to significantly drive security services revenue higher.
Loe noted that in the early stages of Nanalysis fulfilling the CATSA contract, between Q2/22 and Q1/24, the biotech's quarterly EBITDA and cash flow were low. Both metrics now are trending upward but could be "choppy" in the next quarter or two, before they turn around, which is expected as soon as by year-end 2024.
The security services division is still ramping up to steady-state levels from the CATSA contract alone, Loe noted, and now is contributing positively to topline growth.
Leede expects revenue from this line of business to reach CA$22.2M this year, up from CA$12.1M last year, and to grow further in 2025 to an estimated CA$24.5M.
Notable Gross Margin
Loe pointed out that Nanalysis continues to deliver a robust gross margin, about 53% on average during the last three years, despite facing escalating component costs and ongoing global supply chain problems.
"The supply chain remains sensitive to geopolitical issues, but in our view supply chain obstacles might be resolved through additional supply tailwinds in North America," noted Loe.
The average gross margin of Nanalysis' peers is 47.2%. Even though Nanalysis is the smallest company by market cap among them, its gross margin places it at the top end of the group.
"Although the NMR space is a niche industry occupied by five industry incumbents (of which Nanalysis is one), we view the firm's investments in software and artificial intelligence to be critical to growth," wrote Loe.
The analyst added that Nanalysis' ability, via One Moon Scientific, to develop machine learning for specific industrial applications, thereby eliminating the need for operator expertise, differentiate it from other benchtop spectrometer peers.
Balance Sheet, Share Structure
Nanalysis ended Q3/24 with CA$0.2M in cash and CA$15.3M in debt.
The company has a market cap is CA$40.7M. It has 113.1 million (113.1M) basic shares outstanding and 128.9M fully diluted shares outstanding.
Multiyear Forecasts Given
In his report, Loe presented Leede's forecasts for 2024 through 2027, all sequentially higher year over year.
"Our model assumes that Nanalysis can achieve equilibrium gross margin/EBITDA margin for consolidated capital equipment/security services operations at or above 45%/22% respectively in FY27 and thereafter," the analyst wrote.
Leede projects full-year revenue of CA$44.7M for 2024, CA$46.1M for 2025 and CA$49.3M for 2026 and CA$52.5M for 2027.
The investment firm forecasts a full-year gross margin of 27.7% in 2024, 38.1% in 2025, 42.2% in 2026 and 43% in 2027.
Leede estimates a full-year EBITDA of 3.1% in 2024, 14.8% in 2025, 22.2% in 2026 and 23.3% in 2027.
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Leede Financial Inc., Nanalysis Scientific Inc., November 25, 2024
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