Broker sees 400% share price upside in well advanced Avita

/, Speculator's Corner/Broker sees 400% share price upside in well advanced Avita

Shares in Avita Medical increased sharply on Friday from the previous day’s close of 10.5 cents to 11.5 cents. However, this needs to be put in perspective as there was a strong surge throughout early March which resulted in it hitting a 12 month high of 12.5 cents on March 14, only to pullback shortly thereafter.

Given the substantial and significant news flow that occurred throughout the month of March, including five developments that occurred in the first half of the month concerning various areas of its products and technologies in trial, as well as new distribution arrangements, suggest the rerating could be much stronger.

Indeed, analysts at Morgans CIMB are looking for a lot more out of the stock with their target price set at 57 cents. The broker initiated coverage of the company last Friday and this perhaps contributed to increased interest in the stock.

Interestingly, 12 cents was where the shares peaked at in October 2015 when they doubled from circa 6 cents in a matter of weeks. This rerating occurred after Avita was awarded a contract to the value of up to US$53.9 million for late stage clinical development and procurement of its proprietary ReCell Autologous Cell Harvesting Device.

The five-year contract was negotiated with the US biomedical advanced research and development authority under the Federal preparedness plan for mass casualty events. It involves a commitment to funding of US$16.9 million to support Avita’s ongoing US clinical regulatory program towards FDA pre-market approval and to procure more than 5000 ReCell devices to establish an inventory so that the product can be deployed to help deal with mass casualty scenarios involving burn injuries.

Avita’s global expansion was at the centre of key developments occurring in March. At the start of the month the group announced it had launched two new products in Europe, ReGenerCell (chronic wounds) and ReNovaCell (repigmentation). Importantly, these both have the mandatory CE Mark approval required for certain products sold within the European Economic Area.

These products employ the proven regenerative technology first developed for ReCell. The significance of launching these products is that the group now offers a suite of products that can treat wide-ranging skin conditions including mass end markets such as diabetic foot ulcers and venous leg ulcers.

The successful treatment of such wounds would have a marked impact on reducing healthcare costs worldwide, suggesting the possibility of further support for the company at a government level. On this note, Avita provided a presentation regarding a series of 12 cases showing length of hospital stay for patients with extensive burn injuries decreased by 63% when treated with ReCell.

On the contract front success occurred in early March with China’s largest healthcare group, Sinopharm, granted sole distribution of the Avita range. Avita highlighted it had been drawn towards Sinopharm in part because of the group’s wide reach as it has offices in all main Chinese cities and representation in 31 of the group’s provinces and regions.

Gaining entry into China is a significant development for Avita given there are approximately 3.4 million people hospitalised each year with burn injuries.

Morgans CIMB is impressed with the story. While the broker outlined significant milestones ahead given the group’s diverse product range, a key factor that is likely to become an important share price driver in the upcoming 12 months is the fact that Avita is expected to deliver its maiden net profit of $6.8 million in fiscal 2018 (based on Morgans CIMB projections).

Furthermore, in that year the group is forecast to deliver revenue growth of circa 500%. Morgans indicated in its initiation coverage that the group is trading on a fiscal 2018 PE multiple of 6.4 relative to a share price of 10 cents.

While the group’s shares increased circa 10% on Friday, it remains a low PE stock given its earnings visibility, relatively near term profitability, diversification by product and regional distribution, as well as the prospect of market moving developments with projects in the pipeline.

Morgans highlighted the group had a cash backing of $7.7 million as at the end of the second quarter of 2016. The broker has factored in an equity raising of $10 million in calendar year 2016 which it expects will see the company through to profitability in 2018.

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