TS03 Inc Trust Units TSTIF

Canaccord Genuity Research Report

[anon314]

Sara Elford on 2 Feb 2015.

Summary

Investment recommendation

No change to our SPECULATIVE BUY rating or C$3.00 target price following the conference call update held last week. During the call, management again reviewed the value proposition of its recently cleared (U.S. market) STERIZONE VP4 sterilizer and also detailed current preparations for commercial launch, including two new senior level hires to oversee operations and sales & marketing related plans. TS03 also discussed its go- to-market strategy generally, which we still fully expect to culminate in a broader and larger channel partner agreement and eventual takeover of the company. Management remains focused on maximizing shareholder value.

After an initial rally following FDA approval, the share price has pulled back to very attractive levels, in our view. Investors appear to be uncertain with respect to the timing of next catalysts, while also anticipating an eventual equity raise to support accelerating commercial activities. As noted in our prior research, while TSO3 has sufficient cash well into 2016 at the current burn rate, the path to positive cash flow will initially require the burn rate to increase based on our forecast.

Our positive view continues to be based on:

1. We think the VP4 is a better mousetrap, with significantly higher throughput [=significantly lower cost to sterilize per instrument], flexibility and safety; and

2. This is also a good business, in our view, with high barriers to entry, high recurring revenue, high margins and low capital intensity (= high free cash flow potential).

Valuation

Our target price is supported by our DCF analysis (18% discount rate). We continue to use the expected economic splits under the old 3M agreement even though TSO3 currently retains all of the potential value.