Research Capital Corporation analyst Yue (Toby) Ma continues to look favourably upon Nanalysis Scientific Corp. (Nanalysis Stock Quote, Chart, News, Analysts, Financials TSXV:NSCI), maintaining a “Speculative Buy” rating while raising his target price to $2.20/share from $1.90/share in an update to clients on Wednesday.
Established in 2009 and headquartered in Calgary, Nanalysis Scientific is a vertically integrated global scientific instrument manufacturer that develops and markets proprietary benchtop nuclear magnetic resonance (NMR) systems and magnetic resonance imaging (MRI) consoles, as well as providing software solutions in multiple markets, including food, pharma/biotech, chemical, academic research, security/forensics, petroleum and education.
Ma’s latest analysis comes after the company announced it signed a binding letter of intent to acquire KPrime Technologies, a North American contract sales and service company, with a particular focus on scientific instrumentation for customers in the pharma, food, chemical and oil & gas sectors.
KPrime, which Ma notes has been profitable since its inception in 1997, recently expanded its business to sell imaging systems for security applications.
“We view the acquisition of KPrime as a synergistic transaction since it should not only expand NSCI’s sales channels through KPrime’s sales team and existing clients, but also enable KPrime to gain access to NSCI’s existing customer base,” Ma said. “The KPrime transaction should also be financially accretive as its business has been profitable.”
The terms of the agreement call for Nanalysis to pay KPrime $3 million in cash upfront, with the remainder paid out in 2.76 million Nanalysis common shares, which are subject to a two-year lock-up period; KPrime shareholders could also see a potential $1 million earnout over two years based on revenue objectives.
KPrime has positioned itself as a prime target over the last four fiscal years, as the company generated annual revenue between $8 million and $10 million on average, with approximately $1 million to $1.5 million in EBITDA per year.
“Joining forces with such an experienced sales and service organization is a unique expansion opportunity for Nanalysis,” said Sean Krakiwsky, founder and CEO of Nanalysis in the company’s November 10 press release. “Our vision is to provide full sales and service coverage in every major market in the world, most importantly in the United States and Canada. We need a living, breathing, thriving, and resilient sales organization that evolves globally as we grow. KPrime constitutes this living sales organism that is focused on driving growth and can ingrain the ethos of profitability into our entire company.”
The KPrime news has prompted Ma to revise some of his future financial projections for Nanalysis. With 2021 revenue still set to produce a near double at $15.1 million, Ma now expects 2022 to be even better from a growth perspective, raising his revenue projection to $31.1 million from $22.6 million, a 38 per cent change in the estimate while representing a potential year-over-year increase of 106 per cent. From there, Ma expects a more gradual growth curve for the rest of the decade, culminating in a projection of $63.4 million (previously $52.5 million) in 2030.
Ma is projecting similar growth in the company’s gross profit beginning in 2022 at $18.7 million (previously $14.7 million), with eventual growth to a projected $38 million (previously $34.1 million) in 2030. However, in that time, Ma also forecasts the company’s gross margin to drop from 27 per cent in 2022 to 12 per cent by 2030, with the biggest dropoff period occurring between 2022 (27 per cent) and 2024 (18 per cent).
Ma projects further increases across the board, forecasting a 95 per cent change in the 2022 net income to a projected $1.8 million with a gradual increase to $11.4 million (previously $10.7 million) by 2030, along with higher operating income ($4.9 million in 2022, previously $4 million) and increase selling and general administrative expenses ($12.1 million in 2022, previously $9 million).
On a pro forma basis, Ma estimates that the company’s EBT will turn positive in 2022 at a projected $1.8 million after years of losses, then projecting a growth curve that reaches $15.5 million in EBT by 2030.
Ahead of the company’s next reporting period on November 18, Ma believes the KPrime acquisition may just be the latest in an ongoing series of growth plays for Nanalysis.
“One of our investment theses for NSCI is the company’s continuous acquisitions of complementary assets,” Ma said. “Management has been delivering on this front with today’s announcement and the previously closed One Moon Scientific acquisition. We would not be surprised if NSCI continues to acquire additional businesses down the road.”
Overall, Nanalysis’s stock price has risen by 206 per cent for the year to date, having hit a new high point of $1.53/share on the TSX Venture Exchange today. At press time, Ma’s new $2.20 target represented a projected one-year return of 50 per cent.