COMPANY Compumedics (CMP) MCAP $62m $0.36/share Date: 27 February 2019 RECOMMENDATION Buy and PT $1.00/share, High
Risk EVENT HY’19A | Growth across all regions and products KEY POINTS FY’19F guidance remains at sales of $40m to $42m and EBITDA of $5.5m to $6.5m. This implies 2H’19F of sales $21m to $23m and EBITDA of $4.0m to $5.0m vs pcp of $3.1m, a 45% lift on pcp. We retain a Buy on CMP and expect it to re-rate towards $1.00 as Base (sleep & neuro diagnostic devices & services) deliver reliable growth over next two halves, and one more Orion MEG order is made this year. (MEG = MagnetoEncephaloGraphy brain wave measuring machine) The X-factors are a quick partnering of consumer sleep device(SomFit) or multiple MEG orders. The risk of a slow-down to Base appears to recede with this strong result, but a pause to the next MEG order is still realistic as customers wait for 6-12 months for first MEG at Barrow, USA to perform. FY’19F METRICS PER 16.2x | EV/EBITDA 10.1x | Yield 0.0% LINK TO RESEARCH NOTE RN_CMP_270219 – 6 pages INVESTMENT VIEW We retain a Buy on CMP and expect it to re-rate towards $1.00 as Base (sleep & neuro diagnostic devices & services) deliver reliable growth over next two halves, and one more Orion MEG (MagnetoEncephaloGraphy brain wave measuring machine) order is made this year EBITDA of $4m in perpetuity with no-growth gives $0.25/share. If Base grows at 10%pa and one Step Out delivers (MEG) our valuation jumps to our Base Case of $1.00/share. If the other Step Out (SomFit) is partnered and delivers then DCF is at least $1.70/share UPCOMING EVENTS – Executive Chairman and Finance Director presenting at pac Thursday 21 March – 4:30pm Meeting in PAC Office – Kyle House, MG Level, 27-31 Macquarie Place, Sydney Thursday 28 March – 12:30pm Meeting in PAC Office –Level 10, 330 Collins Street, Melbourne COMPANY BACKGROUND Compumedics (CMP) is a leading supplier of sleep and neurological diagnostic devices globally, with around 20k units installed and 1,500 units sold annually for $9k to $25k. 15% of group sales come from recurring services for existing units. CMP has captured around 30-40% of the premium end of sleep and neurological clinics across Nth America, Europe and China/Japan/Australia. Since 2012 CMP has developed a lower cost solution for sleep/diagnostics with simpler units and an eHealth platform for the smaller testing centres. CMP has also upskilled its neurological devices to move from a software supplier to 100 (of 130) ~A$5m Orion MEG machines to a supplier of the full device with Korean Partner (KRISS). The first Orion MEG was installed in reference Barrow Institute in Arizona USA in 2018. CMP will take a simple sleep diagnostic device (SomFit) to the retail market, and would prefer to do with a consumer goods partner. KEY DRIVERS Sleep and neuro diagnostic growth in clinics (hardware & software) and smaller centres (amplifier & cloud) Brain wave diagnostics for autism, dementia & other neurological conditions (Orion MEG MagnetoEncephaloGraphy) with partners (Korean KRISS) Consumer sleep testing with simplified “wristwatch” (SomFit) MILESTONES Core sleep and neuro to deliver $5m EBITDA in short term, and eHealth another $5m within three years Sell 1 off Orion MEG (with ~$2m EBITDA) each year in short term and build to five per year over long term Large scale demonstration of SomFit over the next year and potential partnering by 2020 RISKS $9k to $25k per unit core sleep and neuro diagnostic business becomes low margin with competition and/or slow turnover. Mitigation: CMP saw this squeeze and: lowered cost; increased geographic distribution; and, accelerated eHealth products and services. $5m Orion MEG machine adoption rate is slow. Issue: There used to be 10 units sales per year of lower accuracy MEG with CMP software in ~80% of MEGs sold. The pause over last three years for upgraded Orion MEG with CMP/KRISS improvements suggests a major re-think, and perhaps focus on using “slower” 35,000 installed Magnetic Resonance Imaging machines (MRI). It is more likely that the 40 customers on “interested” list are waiting for more test data from installed US – Barrow Institute. Individual hospital local budget allocation and building space are also required to place an order with $1m upfront cost. $200 SomFit consumer product is too far from CMP’s core and distracts team. Mitigation – CMP is trying to partner SomFit. CMP will do trials with Diabetes and Sporting groups in order to raise profile. CMP also has a new range of equipment for the home sleep-testing market which will extend the Base unit market and keep CMP up to date on what home testing services are relevant. DETAIL – HY’19A Sales increase of 16% from $16.1m to $18.7m (+12% with constant FX rates), and sales orders on-hand are up over the last six months from $6.9m to $7.3m. EBITDA increase 36% from $1.1m to $1.5m with constant gross margin of 58% There was growth across all regions and products (with say 1250 units at $12k/unit and $3m of services and eHealth). · Asia/Australia up 22%. Significant new contracts into China with sleep and neuro devices. · USA up 16%. Sales team continues to grow, and increases CMP presence in the mid-market with lower cost diagnostic devices and eHealth services. If we strip out say $0.5m of sales for say 10% of the Orion MEG machine delivered in 1H’19A there was 8% growth in USA sales. This is still better than the flat to down sales over the last two years. · EU up 11%. Germany delivered well in 1H’19A and now CMP is expanding its French sales team It is significant that the Base sleep and neuro device market has picked up in USA and ROW, after negative sales growth in USA and lumpy sales in EU. It appears that CMP has got the product mix and inventory right. The price points with premium and budget device are also working. The first MEG machine at $4m is ~50% through P&L and the rest should come through in 2H’19F FY’19F guidance remains sales $40m to $42m and EBITDA $5.5m to $6.5m, which implies 2H’19F of $21m to $23m and EBITDA of $4.0m to $5.0m vs pcp of $3.1m Net cash of $2.5m at 31 December, and CMP is set to be cash flow positive in 2H’19F. Should you have any queries, please do not hesitate to contact me on + 613 8633 9864
CMP Price at posting:
33.5¢ Sentiment: Buy Disclosure: Held
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