The Nanosonics Ltd (ASX: NAN) share price has been one of the better performers on the ASX over the last decade. Nanosonics’ FY20 results missed the market’s expectations, however, the NAN share price has recovered quickly.
Here’s a hypothetical question that I think is worth asking: what could the Nanosonics share price be worth in 2025?
What does Nanosonics do?
Nanosonics is an Australian developer of infection prevention technologies. Nanosonics is best known for its trophon EPR systems and the current iteration, the trophon2, ultrasound probe disinfection system. Disinfection takes place in an automated, closed system and uses a sonicated hydrogen peroxide mist. Nanosonics makes money by selling the unit (a capital sale) and the liquids and equipment that are used by the machine (consumables).
Today, Nanosonics has a global installed base of about 24,000 trophon units, and counting.
Trophon’s value proposition
The ideas below focus more on Nanosonics’ trophon 2 device, which currently makes up nearly 100% of total trophon sales.
For hospitals thinking about probe disinfection, key strengths of the trophon 2 system include:
- An enclosed mobile system, allowing it to be used at the point of care. This has the advantage of streamlining workflows, by not having to transport probes between the ultrasound suite and separate cleaning rooms – it can all be done in the exam room.
- Automated, ensuring consistent and reliable high-level disinfection.
- Environmentally friendly as water and oxygen are the outputs of a disinfection cycle.
- Highly compatible, since it’s approved for use with over 1,000 probes from major and lesser-known ultrasound probe manufacturers.
- AcuTrace – this is an electronic track-and-trace feature allowing for the capture and storage of disinfection cycle data.
Nanosonics’ FY20 AGM
At the Nanonsonics annual general meeting, Chairman Maurie Stang highlighted that, “Globally, in FY20, the trophon installed base grew 13 percent and by the end of June there were 23,720 units performing approximately 78,000 daily cycles”.
This information was mostly already known as the market appeared to be disappointed with Nanosonics’ FY20 result in August, sending the share price down nearly 10%. Read the finer points of Nanonsics’ FY20 result and why the share price got whacked.
However, at the recent AGM, Nanosonics CEO Michael Kavanagh hinted a new product is under development: “We remain confident in the opportunity for this product as the unmet need is unchanged and continues to remain significant”.
Michael made it clear that trophon sales have not peaked: “From a standard of care perspective, globally there is still a very large opportunity for trophon with current market penetration of the Global Total Addressable Market at approximately 20% based on current internal estimates”.
Michael also touched on growth for the first four months of FY21:
- The number of new trophon units installed globally was up 16% compared with the last four months of FY20
- Purchases of consumables were up 25% compared with the last four months of FY20 (which coincided with the first wave of COVID-19).
Are NAN shares cheap?
Nanonsonics currently has a price/earnings ratio of 207x . This appears to be pricing in perfection, and any slip-up could be punished by the market, such as when Nanosonics released its FY20 result.
What is a reasonable 2025 valuation for Nanonsonic shares?
Nanosonics’ trophon systems have an estimated 20% global market penetration, and consumable sales are growing. For simplicity, I think it might be reasonable to assume growth between FY15 to FY20 can continue into FY25. Nanosonics revenue grew 5x (400%) between FY15 and FY20.
I will assume that FY25 earnings per share (EPS) follows suit and expands 5x from FY20 (EPS of 3.37 cents per share) to 16.85 cents per share.
This carries the assumption that net profit after tax (NPAT) margins remain at FY20 levels and that there is no dilution from the issue of new shares.
Growing 5x over five years equals a compound annual growth rate (CAGR) of about 38%. Using the PEG ratio introduced by investment great Peter Lynch, a reasonable P/E might be 38x. Read more on the PEG ratio here.
Applying a P/E ratio of 38x to 16.85 cps of earnings gives an FY25 valuation of $6.40. At the time of writing, Nanosonics shares trade above this valuation, at $7.08. I would probably want to buy shares at under $4 to be confident of earning a reasonable return.
