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Results in: Are Nanosonics Ltd (ASX:NAN) shares in the buy zone?

The Nanosonics Ltd (ASX: NAN) share price has drifted lower on Monday following the release of the infection control specialist’s results for the 12 months ended June 30. At the time of writing the company’s shares are down 2.5% to $3.42 but were down as much as 8% to $3.23 at one stage.

In FY 2018 Nanosonics achieved total sales of goods and services of $60.7 million and profit after tax of $5.8 million. This was a decline of 10% and 79%, respectively, on FY 2017’s result. Operating expenses for the year were $42.6 million compared to $37 million in the prior year.

The majority of its revenue was generated in the North American market. Revenue in the region was $54.4 million in FY 2018, down from $62.3 million a year earlier. According to management, the reduction in revenue was primarily associated with a transitionary reduction in capital revenue due to the earlier than anticipated regulatory approval of its trophon2 product and subsequent run down of trophon EPR inventory by distributors. In addition to this, the company noted that some customers deferred purchases, pending the release of the new model.

The sharp reduction in profits reflects the growing investments in the company’s strategic growth agenda plus transitionary impact of reduction in capital sales.

Pleasingly, revenue associated with consumables and services was up 22% to $30.3 million during the year, reflecting the strong ongoing growth in its installed base.

The installed base of the company’s trophon product grew by 26% in North America to 16,620 units. Combined with a 49% increase in Europe, the Middle East, and Africa and a 9.4% increase in the Asia Pacific region, the total global installed base grew by 25% in FY 2018 to 17,740 units.

Management has advised that this total installed base growth means that each day a massive 55,000 people globally are being protected from the risk of cross contamination because their probe has been trophoned.

But this number could still grow significantly in the future. The company estimates that it currently commands only a 15% of the overall market opportunity of 120,000 units globally.  In addition to this, Nanosonics’ second generation trophon product is now targeting one of more new infection prevention solutions by the end of FY 2020, subject to regulatory approvals.


Management expects continued growth in the installed base in North America with FY 2019 adoption similar to FY 2018. This will be underpinned by upgrades of units older than 5 years and GE North America rebuilding its inventory of capital equipment following the launch of trophon2.

In Europe the company expects to see a material uplift in unit growth thanks to the MES program in the UK. FY 2019 unit growth is expected to be 75% to 100% over FY 2018 in the market. This should be supported by favourable new guidelines in Germany and the launch of trophon2 in that market.

The Asia Pacific segment will be given a boost late on in FY 2019 if trophon2 is granted regulatory approval in Japan.

Should you invest?

While the headline result looks weak, I think investors should focus more on the growth of its consumables and services. These recurring revenues are growing fast and have the potential to be significant in the next decade as its installed base continues to grow.

So while its shares may look expensive today, investors that are willing to hold onto them for the long term could be rewarded handsomely. Especially if the company’s development of new infection prevention solutions leads to further sources of revenue.

In light of this, I would put it up there with the likes of Volpara Health Technologies Ltd (ASX: VHT) and Pro Medicus Limited (ASX: PME) as one of the best healthcare technology shares on the Australian share market.

As well as Nanosonics, I think these up and coming star stocks are ones to watch in FY 2019.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Nanosonics Limited, PRO Medicus Ltd., and VOLPARA FPO NZ. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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