TS03 Inc Trust Units TSTIF

RE:Canaccord Genuity Boosts TSO3 Inc. Price Target to C$3.50

[echo2]

Not sure who this financial 'reporter' is, but she had her news wrong, and her dates. Canaccord issued a positive analyst update May 5 following the last quarter, not June 24, with a $3.50 target. I think this has previously been posted.

I will post Canaccord's summary again, FYI.

We are still waiting to have 'someone' post the GMP Securities recent initial coverage here, or at the very least some of its important details and summaries. (But, of course, this presupposes 'they' can figure out how to cut and paste, "command c", or use Dropbox.)  :)

"Neil Maruoka, MSc, MBA | Analyst | Canaccord Genuity Corp. (Canada) | [e-mail] | 1.416.869.3073

Matt Bottomley | Associate | Canaccord Genuity Corp. (Canada) | [e-mail] | 1.416.867.2394

Company Update

Q1/16 results: We have liftoff

Investment Recommendation

TSO3 reported strong Q1/16 financial results that were ahead of our estimates on higher than expected shipments of VP4 sterilizers. We had estimated modest initial sales of VP4 under the new exclusive distribution partnership with Getinge; however, TSO3 handily beat our 15 unit estimate, shipping 25 units to Getinge in the first full quarter since the agreement was signed. In our view, this represents a critical first step towards becoming EBITDA-positive, with management building credibility on its ability to execute its plan. We believe the company is now poised to ship more than 100 VP4 units in 2016. TSO3 reported revenue of US$3.1 million for the quarter (versus our estimate of US$2.4 million), already eclipsing total revenue recorded during FY2015. For the quarter, the company reported Adj. EBITDA of (US$0.6 million), in line with our estimate of (US $0.7 million).

We would be buyers of the stock at these levels with an eye towards the continued sales ramp for VP4 in 2016 and a potential decision from the FDA on expanded claims for the sterilization of flexible endoscopes, which remains on track for this year

Investment Highlights

• Getinge minimums for 2016 will likely be higher than we originally thought. TSO3 recently indicated that the number of units ordered late last year satisfy Getinge’s contractual minimums for 2016. Although we remain uncertain as to what that minimum is, the company stated it is currently ‘in a position to assemble and deliver in excess of 100 sterilizers’ this year – and has already achieved 25 unit shipments during the first quarter.

• Contractual minimums set a valuation floor. We believe the minimums within TSO3’s distribution deal with Getinge provide downside protection to our valuation of >$2.50 per share. Further, a solid balance sheet presents additional valuation support as the company transitions to positive EBITDA and cash flow in 2017.

• Expanded claims provide upside to our forecasts. We believe the claims around the sterilization of multichannel flexible endoscopes could lead to substantial upside to our market penetration forecasts. Management was confident that the company could receive regulatory approval for the expanded claims in 2016.

Valuation

We value TSO3 based on a DCF model, using an 11.0% discount rate (previously 11.2%) and a terminal growth rate of 2.0%. We have made modest adjustments to our forecasts (which are now in USD) to include modestly higher shipments of VP4 units in 2016, while decreasing the estimate net-sales margin on sales to Getinge. As a result, our target price remains unchanged at C$3.50. Our target represents an annualized return of 55.6% and continues to support our BUY recommendation. "