TSO3's PR Confusion and Canaccord Reiterates $5.25 Target..I beg to differ regarding the confusion about the press release Friday. Eunice was not the only one who did not initially see the reference in the subtitle to an $18 M backlog. I had to reread the press release 3 or 4 times before I noticed it, too.
And, Eunice and I were not the only ones confused. Canaccord, in their Morning Coffee from last evening, or early this AM, noted that they wondered about the justification for a press release to only mention that Getinge had made their base order for 2017 as they also did not see, at first glance, any reference to numbers:
"TSO3* (TOS : TSX : $2.56), Net Change: 0.09, % Change: 3.64%, Volume: 367,509
SOMETIMES GOOD THINGS TAKE WAY MORE TIME. Companies normally make press releases to disseminate material information to the markets. TSO3 announced on Friday that it had received initial purchase orders from Getinge USA, Inc., for fiscal 2017. These orders will increase the rate of production and throughput from the company's assembly facility in Quebec throughout 2017. No financial details, no other numbers were released. At first glance, the company's press release didn't seem all that material. But consider this, during the third quarter TOS assembled and shipped 30 sterilizers to Getinge and recorded revenues of $3.5M for the quarter. Doesn't it sound like Getinge order flow will increase substantially? TOS CEO Ric Rumble has previously stated, "During 2016 our channel partner [Getinge] has gone through multiple changes, but a few things remain clear based on the meetings we have had with Getinge senior management: we remain strategically important to Getinge (and vice versa) and each party remains committed to the collective success of our exclusive relationship." Recall in November 2015, TOS signed an exclusive global distribution agreement with Getinge."
"NO FINANCIAL DETAILS, NO OTHER NUMBERS WERE RELEASED. AT FIRST GLANCE, THE COMPANY'S PRESS RELEASE DID NOT SEEM ALL THAT MATERIAL." In other words, whoever did this 'glance' also did not notice the subtitle referring to the $18 M backlog. This backlog is obviously material and very positive! But, to insert it as a subtitle before the text of the press release was just poor form, and, frankly, stupid. (I hate to have to agree with Eunice! :)) ) I hope management takes this up with their PR firm Liolios immediately and demands they assist management in correcting the confusion and clarifying this statement about the $18 M backlog in any future press release! (What is Liolios being paid for, anyway?)
However, this AM, Canaccord strongly reiterated their buy and $5.25 target, once they had time to do proper analysis.
Their summary follows:
Neil Maruoka, MSc, MBA | Analyst | Canaccord Genuity Corp. (Canada) | nmaruoka@canaccordgenuity.com | 1.416.869.3073
Matt Bottomley, CPA, CA, CBV | Associate | Canaccord Genuity Corp. (Canada) | mbottomley@canaccordgenuity.com | 1.416.867.2394
BUY
unchanged
PRICE TARGET
unchanged
Price (2-Dec) Ticker
C$5.25
C$2.56 ; TOS.CA TOS-TSX
Company Update
Getinge provides a vote of confidence
Investment Recommendation
TSO3 announced that it has received purchase orders (PO) from partner Getinge that
will likely result in an increase in VP4 shipments next year. Recall that TSO3 has shipped 80 VP4 units to Getinge through Q3 following the US launch at the beginning of 2016, and we anticipate a strong fourth quarter to finish the year, as hospital capital equipment spending usually accelerates into year-end. Following the recent P O, TSO3 now has a reported backlog of ~$18 million; based on an approximate wholesale price of $110K per VP4 unit (plus accessories and initial consumables), we estimate that this represents approximately 160 units. Investors should note that neither TSO3 nor Getinge have disclosed the annual minimums within their partnership contract, but we assume that it is likely close to this number. With the potential for additional PO's through 2017 (as the US and Euro launches of VP4 accelerate), we believe TSO3 has the potential to meet our forecast 195 units next year. We believe this PO is a vote of confidence from Getinge and should represent a solid start to the second year of commercialization for VP4.
Despite steady shipments of VP4 to Getinge, we believe recent stock weakness reflects investors’ uncertainty about the growth of the installed base and market acceptance during the early stages of product launch. We continue to believe that VP4 has the potential to dominate the low-temperature sterilizer market; for investors with a two- to three-year time horizon, we believe that fundamentals remain intact and we would view current weakness as a buying opportunity.
Investment Highlights
• Clarity on installed base would help build confidence. Following the quarter, we continue to await data on VP4 installations and adoption. Management has indicated that it will provide an update early in the new year, which should provide clarity on Getinge’s success during the early phases of launch.
• VP4 may become a more important driver for Getinge. Because partner Getinge
has experienced challenges in other areas of its business, we believe there may be some concern that this could be affecting the VP4 launch. We believe that TSO3 could become an even more important growth driver for Getinge and may eventually become a takeover target for its partner.
• VP4 shipments should grow steadily in the near-term, but extended claims drive upside to our forecasts. Given the long-sales cycle for sterilizers, we do not expect the impact of the extended claims to be felt for several quarters. However, we believe that the upside potential from this market opportunity is significant.
Valuation
We value TSO3 based on a DCF model, using an unchanged 13.5% discount rate and 3.0% terminal growth. Based on this analysis, our target remains at C$5.25, which represents an annualized forecast return of 105% and continues to support our BUY recommendation.