TS03 Inc Trust Units TSTIF

Canaccord Genuity Report in dance of the conference call

[anon314]

... will be interesting to see if there is a change in opinion after the conference call.

Investment recommendation

No change to our TSO3 SPECULATIVE BUY rating or C$3.00 target price following the release of Q1/15 financial results this morning and ahead of the AGM later today.

Investment highlights

• Q1/15 financial results were in line with our expectations (C$0.1 million in revenue and a loss per share of C$0.02). As expected, TSO3 was in preparatory mode during the quarter following U.S. clearance for its STERIZONE VP4 sterilizer in December 2014. The company significantly bolstered its balance sheet, made key hires, and signed its first non-exclusive distribution agreement with Getinge Infection Control in support of the launch of the VP4. Commercial activities have been initiated and we expect first modest sales in Q2/15, ramping steadily thereafter.

• As noted in past research, recent reports of infections and deaths after several patients contracted an antibiotic-resistant strain of bacteria following endoscopic procedures with a device made by Olympus Corp. (majority market share) in the U.S. are potentially very relevant to TSO3. Cleaning procedures (high level disinfection required) proved to be insufficient.

• TS03 has accelerated testing on its own and with others with the intent of expanding its claims in the U.S. so that it can offer terminal sterilization for these devices. Management figures there are more than 1,000 locations that perform related procedures (more than 500,000 such procedures annually). At US$150,000 per unit, that's a >US$150 million capital opportunity with success. More notably, it could translate into more than US$20 million of annual recurring cash flow from the sale of associated consumables. This could be a game-changer.

• Our financial forecast is not materially changed at this time. Valuation

  Our target price is easily supported by our DCF analysis (18% discount rate and 2% terminal growth rate). There is ample room to lower our discount rate, but given the potential return to our existing target price, we see no need to make any adjustments at this time.