Compumedics – CMP:ASX

These guys make medical tech for sleep diagnostics. Here’s a summary from our previous look at them (June 19): 

• Organic growth driven by reasonable returns. 
• They’ve been around for quite some time, and always seem to be on the cusp of greatness, but never seem to make it. 
• It looks like they’re trying to pivot from a premium pricing model to one that is more competitive. 
• They did the installation of a MEG sleep scanner at The Barrow Neurological Institute, hoping this leads to more large installations.
• 3 Holds – Price ranged from 35c – 46c

There’s quite a lot going on for these guys. They’ve historically played at the Premium end of the Sleep diagnostics segment, and have largely found their niche in a pretty packed market. 

They’re currently trying to build out the Neuro-diagnostics segment of their business, MEG seems to be next-generation MRI, able to capture more dynamic brain activity needed for diagnosis/research of Alzheimer’s and so on. They anticipate global TAM for MEG is 20 installations per annum, and hope to build their market share in that space. 

Secondly, they’re trying to branch their premium sleep diagnostics products line into the mid-tier, selling more units and creating market share. 

Thirdly they’re trying to build their consumer application product Somfit. It is the best sleep scanner on the market but involves a thing stuck to your head, feel like this will be a no-go for that reason, and they’ve been trying to market this for 4 years now. 

A lot of these growth plans are in early stages, and there is a potential for some big growth, but there’s also some “potential market size” forecasting wizardry, so there’s also the potential for things to just continue roughly as-is for a while more. This has been their story for a long time now, and there’s a huge question mark over whether the market is actually there, and their ability to actually deliver into it.

Weighing machine

Looking at their numbers, they’ve been successfully growing sales and book value for the last 6 years, but their earnings have been pretty flat. RoE fluctuates pretty widely between 6-20%, and they don’t tend to pay out a dividend. They only have 6% debt. Insiders own about 6% of the company (~$4.5M).

Voting machine

They’re relatively popular, with PE trading at between 12x and 27x in recent years. Currently they’re sitting at the upper end of this at around 22x. 

Recent events

They’ve started to embark on their journey to install MEGs into major neurological institutions. Each one adds about 10% to their revenue. 

They got smashed in FY 20, basically sleep centre work is a “nice to have” and in the midst of a pandemic the demand has gone through the floor. They seem to have taken the opportunity to clear the books, removing a significant amount of money from their intangible assets and declaring a loss for the year. Without this impairment they’d have been in profit… though at about 50% lower than last year.

Valuation

SWSt has them valued at $2.31

My 7YrCF has them at $0.30

My WeVo Valuation has them at $0.53

Final thoughts

Pros: They are a well run business, with little debt and reasonable cash flow. If they can make headwinds into their three main revenue streams their pedigree and management style should be able to turn them into a great company.

Cons: That’s a big “if”, they’ve been courting greatness for a long time, with no real progress. This is a niche market, with a number of different players, and they don’t have any real competitive advantage. They’ll always be a little player. 

Result: I really like these guys, I’ve been looking at them since 2016, and I really want them to succeed… and there’s always reasons and avenues to pursue, but not much has happened to really drive them to take that next big step. They continue to grow sales, they continue to grow book value, but their earnings have been stagnant. I’d like to see either a major price drop, to make it worth buying in for the current level of growth, or some solid evidence that they’re making headway into the markets they’ve outlined. HOLD: Buy at <30c, sell at >$1