The PolyNovo Ltd (ASX: PNV) share price may have jumped 56% over the last 12 months, but one fund manager believes it can still go higher.
Who is bullish on PolyNovo?
According to a recent update by the DNR Capital Australian Emerging Companies Fund, it has recently initiated a position in PolyNovo.
PolyNovo is the medical device company behind the NovoSorb technology, which was developed by CSIRO following the Bali bombings.
NovoSorb is a biodegradable material that can be used to aid the repair of bone fractures and damaged cartilage, and in skin grafts.
The key product in its portfolio is the NovoSorb Biodegradable Temporising Matrix (BTM) product. NovoSorb BTM is a wound dressing intended for treatment of full-thickness wounds and burns where the dermal structure has been lost to trauma, or damaged requiring surgical removal.
Why is PolyNovo undervalued?
DNR Capital believes that PolyNovo is undervalued based on its future cash flows.
It commented: "We believe Polynovo shares are undervalued based on our assessment of long-term cash flows. The company has a leading product that is in the early phase of its penetration into a large addressable market of $1.5b."
It's worth noting that DNR Capital isn't including other markets that the company has its eyes on. Adding these into the equation would increase its addressable market opportunity to an estimated $7.5 billion per year according to management.
DNR Capital explained: "We don't ascribe value to the hernia and breast opportunities given the limited visibility on cash flows, as these products need to pass certain milestones before they become commercial."
In addition to this, the fund manager notes that PolyNovo's earnings growth potential is very strong and its outlook is increasingly positive.
"With the business now at a cash-flow break even run-rate, we expect significant earnings growth as it penetrates a large addressable market estimated at $1.5b. The business generates attractive gross margins of 90%, which will lead to high returns on invested capital."
"The company continues to reinvest into research and development with a number of new products to be launched targeting the hernia and breast market, with the combined opportunity valued at $6b," it added.
Should you invest?
I think DNR Capital makes some great points and PolyNovo could be well worth considering with a long term view. Though, given the premium that its shares trade at, you might want to consider limiting an investment to just a small part of your portfolio.
