ADD (previously HOLD)

Current price: A$3.19

Target price: A$4.05

Previous target: A$4.11

Up/downside: 27.0%

Reuters: SOM.AX

Bloomberg: SOM AU

Market cap: US$140.8m

A$183.3m

Average daily turnover: US$0.16m A$0.21m

Current shares o/s 53.29m

Free float: 87.6%

Price Close Relative to S&P/ASX 200 (RHS)

SomnoMed Sleeping Beauty

  • SOM's underlying result was positive with a solid improvement in EBITDA driven by record unit sales.

  • FY17 guidance has been reiterated and RSS starts to contribute in 2H17.

  • Our recommendation moves to Add due to recent share price weakness.

1H17 underlying results positive, margins strong

SOM posted a net loss of A$0.8m, down from an NPAT of A$0.2m on the pcp. Costs associated with the set up and implementation of Renew Sleep Solution (RSS) have been well flagged for some time and this result has been well guided. Additionally, a larger pre-paid tax expense in the half contributed to the lower reported result although we expect this to be largely at the FY17 result. Group revenue growth continued albeit at a slower rate, up 12% to A$23.8m, while unit sales volumes grew 15% to +33k units in the half. The first RSS sites are expected to begin contributing to group revenue in 2H17. EBITDA grew significantly on a like-for-like basis, up 57% to A$1.4m excluding

3.80

3.30

2.80

Vol m

3

Feb-16 May-16 Aug-16 Nov-16

Source: Bloomberg

142.3

122.9

103.4

RSS costs of A$1.0m. MAS margins continued to improve 8bps to 69.3% while group margins improved to 57.7% as direct sales formed a higher proportion of the sales mix. SOM maintains a strong balance sheet with A$16.7m in cash and no debt.

FY17 outlook reiterated; direct sales future driver

Price performance

1M

3M

12M

Absolute (%)

-11.6

-10.4

20.4

Previous guidance of +20% growth in sales expected for 2H17 has been reiterated, with RSS moving forward aggressively and forming a significant growth driver in FY18 and beyond. The core business (ex RSS) is expected to generate FY17 group revenues of A$54m and EBITDA of A$4m, offsetting costs and small initial revenues generated through the initial five-centre RSS roll-out in FY17. SOM has guided to a further 10 centres to be rolled out by end-FY18. To highlight potential performance of these RSS

Relative (%) -14.3 -17.6 4.3

Scott POWER

T (61) 7 3334 4884

Escott.power@morgans.com.au

Iain WILKIE

T (61) 7 3334 4521

Eiain.wilkie@morgans.com.au

sites, SOM anticipates each centre to reach profitability within 12 months and service approximately 1,600 patients with revenues of cA$4.2m and EBITDA of A$1.2m after three years. By these calculations, the first 15 centres are expected to generate cA$63m in revenues and cA$18m in EBITDA from FY20.

Changes to forecasts

We have made no changes to our forecasts in FY17/18/19, however have adjusted the number of shares on issue due to a modeling error. This change increases our EPS figures by 6% over our forecast years. Furthermore, we have dialed down future year growth forecasts (FY20 and FY21) slightly until we see evidence of the RSS performance.

Investment view positive - recommendation upgraded to Add

As a result of our forecast changes in the outer years, our DCF valuation decreases to A$4.05 (from A$4.11). The key downside risk to our target is slower-than-expected growth in the key markets of North America and Europe. Given the recent share price weakness, our recommendation has been upgraded to an Add.

Financial Summary

Jun-15A

Jun-16A

Jun-17F

Jun-18F

Jun-19F

Rev enue (A$m)

34.43

44.08

55.06

73.53

99.39

Operating EBITDA (A$m)

1.21

1.47

0.17

7.43

15.72

Net Prof it (A$m)

0.54

0.07

(0.84)

5.51

12.79

Normalised EPS (A$)

0.01

0.00

(0.02)

0.10

0.24

Normalised EPS Growth

129%

(88%)

(1301%)

132%

FD Normalised P/E (x)

302

2,435

NA

31

13

DPS (A$)

-

-

-

-

-

Div idend Y ield

0%

0%

0%

0%

0%

EV/EBITDA (x)

128.3

99.6

887.0

19.4

8.3

P/FCFE (x)

NA

NA

60.44

24.75

10.75

Net Gearing

(38.6%)

(53.2%)

(63.9%)

(69.5%)

(77.6%)

P/BV (x)

7.58

4.94

5.26

4.50

3.36

ROE

3.2%

0.2%

(2.6%)

15.7%

28.9%

Normalised EPS/consensus EPS (x)

0.93

1.15

1.12

SOURCE: MORGANS, COMPANY REPORTS

IMPORTANT DISCLOSURES REGARDING COMPANIES THAT ARE THE SUBJECT OF THIS REPORT AND AN EXPLANATION OF RECOMMENDATIONS CAN BE FOUND AT THE END OF THIS DOCUMENT. MORGANS FINANCIAL LIMITED (ABN 49 010 669 726) AFSL 235410 - A PARTICIPANT OF ASX GROUP

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Figure 1: Financial summary

Income statement

FY15A

FY16A

FY17F

FY18F

FY19F

Valuation metrics

Price Target (A$)

$4.05

Total revenue

34.4

44.1

55.1

73.5

99.4

DCF valuation inputs

EBITDA

1.2

1.5

0.2

7.4

15.7

Rf

4.00% 10-year rate

4.00%

Associate income

0.0

0.0

0.0

0.0

0.0

Rm-Rf

4.00% Margin

2.0%

Depreciation

-0.6

-1.0

-1.1

-1.3

-1.5

Beta

1.70 Kd

4.20%

EBITA

0.6

0.4

-0.9

6.1

14.2

CAPM (Rf+Beta(Rm-Rf))

10.8% Ke

13.0%

Amortisation/impairment

0.0

0.0

0.0

0.0

0.0

NPV cash flow (A$m)

206.9

EBIT

0.6

0.4

-0.9

6.1

14.2

Equity (E/EV)

60.0% Minority interest (A$m)

0.0

Net interest expense

0.1

0.0

0.0

0.0

0.0

Debt (D/EV)

40.0% Net debt (A$m)

-0.7

Pre-tax profit

0.7

0.5

-0.9

6.1

14.2

Interest rate

4.20% Investments (A$m)

0.0

Income tax expense

-0.2

-0.4

0.1

-0.6

-1.4

Tax rate (t)

30.0% Equity market value (A$m)

207.6

After-tax profit

0.5

0.1

-0.8

5.5

12.8

WACC

9.5% Diluted no. of shares (m)

51.3

Minority interests

0.0

0.0

0.0

0.0

0.0

DCF valuation

$4.05

NPAT

0.5

0.1

-0.8

5.5

12.8

Significant items 0.0 0.0 0.0 0.0 0.0 Multiples FY15A FY16A FY17F FY18F FY19F

NPAT post abnormals 0.5 0.1 -0.8 5.5 12.8 Enterprise value (A$m) 171.9 181.2 184.2 189.9 202.8

EV/Sales (x) 5.0 4.1 3.3 2.6 2.0

Cash flow statement FY15A FY16A FY17F FY18F FY19F EV/EBITDA (x) 142.6 123.7 1094.0 25.6 12.9

EBITDA 1.2 1.5 0.2 7.4 15.7 EV/EBIT (x) 298.8 406.7 -197.7 31.0 14.3

Change in working capital -1.3 1.0 3.8 0.1 0.2 PE (x) 302.2 2435.1 -202.7 30.8 13.3

Net interest (pd)/rec -0.1 0.0 0.0 0.0 0.0 PEG x) -11.0 -27.8 0.2 0.0 0.1

Taxes paid 0.2 0.4 -0.1 0.6 1.4

Other oper cash items 0.0 0.0 0.0 0.0 0.0

Cash flow from ops (1) -0.1 2.9 3.9 8.2 17.3 Per share data FY15A FY16A FY17F FY18F FY19F

Capex (2) -1.5 -3.2 -1.1 -1.3 -1.5 No. shares 51.1 51.3 53.3 53.3 53.3

Disposals/(acquisitions) 0.0 0.0 0.0 0.0 0.0 EPS (cps) 1.1 0.1 -1.6 10.3 24.0

Other investing cash flow 0.0 0.0 0.0 0.0 0.0 Dividend per share (c) 0.0 0.0 0.0 0.0 0.0

Cash flow from investing (3) -1.5 -3.2 -1.1 -1.3 -1.5 Dividend payout ratio (%) 0.0% 0.0% 0.0% 0.0% 0.0%

Incr/(decr) in equity 7.1 10.5 0.0 0.0 0.0 Dividend yield (%) 0.0% 0.0% 0.0% 0.0% 0.0%

Incr/(decr) in debt 0.0 0.0 0.0 0.0 0.0

Ordinary dividend paid 0.0 0.0 0.0 0.0 0.0 Growth ratios FY15A FY16A FY17F FY18F FY19F

Preferred dividends (4) 0.0 0.0 0.0 0.0 0.0

Other financing cash flow 0.0 0.0 0.0 0.0 0.0 Sales growth 32.9% 28.1% 24.9% 33.6% 35.2%

Cash flow from fin (5) 7.1 10.5 0.0 0.0 0.0 Operating cost growth 32.7% 28.3% 28.8% 20.4% 26.6%

Forex and disc ops (6) 0.0 0.0 0.0 0.0 0.0 EBITDA growth 41.3% 21.6% -88.5% 4310.3% 111.6%

Inc/(decr) cash (1+3+5+6) 5.5 10.1 2.8 6.9 15.8 EBITA growth 136.5% -22.5% -309.1% -757.6% 132.1%

Equity FCF (1+2+4) -1.6 -0.4 2.8 6.9 15.8 EBIT growth 136.5% -22.5% -309.1% -757.6% 132.1%

NPAT growth 136.8% -87.5% -1348.1% -757.6% 132.1%

Balance sheet FY15A FY16A FY17F FY18F FY19F Normalised EPS growth -27.6% -87.6% -1301.1% -757.6% 132.1%

Cash & deposits 8.3 17.6 20.6 26.3 39.2

Trade debtors 7.2 7.8 2.3 3.0 4.1 Operating performance FY15A FY16A FY17F FY18F FY19F

Inventory 1.3 1.7 0.0 0.0 0.0 Asset turnover (%) 36.7 32.3 35.9 46.7 50.1

Other current assets 0.0 0.0 0.0 0.0 0.0 EBITDA margin (%) 3.5 3.3 0.3 10.1 15.8

Goodwill 0.0 0.0 0.0 0.0 0.0 EBIT margin (%) 1.7 1.0 -1.7 8.3 14.3

Other intangible assets 0.0 0.0 0.0 0.0 0.0 Net profit margin (%) 1.6 0.2 -1.5 7.5 12.9

Fixed assets 2.1 3.6 3.6 3.6 3.6 Return on net assets (%) 2.7 1.3 -2.9 1.9 2.7

Investments 0.0 0.0 0.0 0.0 0.0 Net debt (A$m) -8.3 -17.6 -20.6 -26.3 -39.2

Other assets 8.9 9.7 9.7 9.7 9.7 Net debt/equity (%) -38.6 -53.2 -63.9 -69.5 -77.6

Total assets 27.7 40.4 36.2 42.6 56.6 Net interest/EBIT cover (x) n/a n/a n/a

Short-term borrowings 0.0 0.0 0.0 0.0 0.0 Invested capital 11.9 16.5 15.5 11.7 11.5

Trade payables 3.9 6.1 2.6 3.5 4.8 ROIC (%) 4.5 0.4 -5.4 47.3 111.0

Long-term borrowings 0.0 0.0 0.0 0.0 0.0 Internal liquidity FY15A FY16A FY17F FY18F FY19F

Other term liabilities 1.1 0.1 0.1 0.1 0.1 Current ratio (x) 4.3 4.5 8.6 8.3 9.1

Other liabilities 0.0 0.0 0.0 0.0 0.0 Receivables turnover (x) 5.4 5.9 10.9 27.8 28.0

Total liabilities 6.2 7.3 3.9 4.7 6.0 Payables turnover (x) 9.1 8.6 12.6 21.4 20.1

Share capital 33.7 44.6 44.6 44.6 44.6

Other reserves 3.7 4.4 4.4 4.4 4.4

Retained earnings -15.9 -15.8 -16.6 -11.1 1.7

Other equity 0.0 0.0 0.0 0.0 0.0

Total equity 21.5 33.1 32.3 37.8 50.6

Minority interest 0.0 0.0 0.0 0.0 0.0

Total shareholders' equity 21.5 33.1 32.3 37.8 50.6

Total liabilities & SE 27.7 40.4 36.2 42.6 56.6

SOURCE: MORGANS RESEARCH, COMPANY

Changes to forecasts

Figure 2: Changes to forecasts

FY17F FY17F % chg

Prev Rev

FY18F FY18F % chg FY19F FY19F % chg

Prev Rev Prev Rev

Revenue

55.1 55.1 0%

73.5 73.5 0%

99.4 99.4 0%

EBITDA

0.2 0.2 0%

7.4 7.4 0%

15.7 15.7 0%

EBITDA margin

0.3% 0.3% 0%

10.1% 10.1% 0%

15.8% 15.8% 0%

NPAT

(0.8) (0.8) 0%

5.5 5.5 0%

12.8 12.8 0%

EPS

(0.015) (0.016) 6%

0.097 0.103 6%

0.226 0.240 6%

DPS

0.0 0.0 n.a.

0.0 0.0 n.a.

0.0 0.0 n.a.

SOURCE: MORGANS RESEARCH, COMPANY

Result highlights

NPAT: SOM recorded a net loss of A$0.8m for the half compared to a small net profit of A$0.2m on the pcp. The decline was primarily due to the RSS set- up costs. Also affecting the result was the prepayment of tax, which is expected to be reversed in 2H17.

Revenue: Increased by 11.5% to A$23.8m. The result was below SOM's typical +20% sales growth due to the transitional impact of the RSS centres and caution amongst a number of US practitioners over the impact RSS may have on their businesses.

EBITDA: Increased by 57% on a like-for-like basis to A$1.4m on the pcp excluding RSS costs of A$1.0m. The increase in EBITDA was due to a combination of increasing revenues on the half and gross margin improvements.

Gross margins: MAS margins improved 8bps to 69.3% while group margins improved to 57.7%. The improvement was a result of a higher proportion of direct sales in the sales mix. We expect these margins to continue to advance as the RSS centres begin to build out.

Balance sheet: SOM maintains a strong balance sheet with A$16.7m in cash and no debt.

Figure 3: Global unit sales Figure 4: Global revenue

35000

30000

25000

20000

15000

17,182.00

18,659.00

20,455.00

22,983.00

24,775.00

26,580.00

28,997.00

26,986.00

33,309.00

25

20

15

10 99.5

12.5

17.8

14.8

19.6

21.3

22.8

23.8

10000

5

5000

0

1H13 2H13 1H14 2H14 1H15 2H15 1H16 2H16 1H17

0

1H13 2H13 1H14 2H14 1H15 2H15 1H16 2H16 1H17

1H13 2H13 1H14 2H14 1H15 2H15 1H16 2H16 1H17

1H13 2H13 1H14 2H14 1H15 2H15 1H16 2H16 1H17

SOURCES: MORGANS, COMPANY REPORTS SOURCES: MORGANS, COMPANY REPORTS

Figure 5: Unit sales growth on pcp Figure 6: Revenue on pcp growth

25%

100%

90%

20%

80%

70%

15%

60%

50%

10%

40%

30%

5% 20%

10%

0%

1H13 2H13 1H14 2H14 1H15 2H15 1H16 2H16 1H17

0%

1H13 2H13 1H14 2H14 1H15 2H15 1H16 2H16 1H17

Unit sales on pcp growth

Average

Revenue on pcp growth

Average

SOURCES: MORGANS, COMPANY REPORTS SOURCES: MORGANS, COMPANY REPORTS

Geographic breakdown

North America (~44% sales): Unit sales slowed to 15.5% (historically >20%) as a result of a mild push-back from SOM's customer base ahead of the RSS direct channel expansion. We believe this is a transitional impact with the RSS centres opening and historical sales growth should resume over the coming half as contributions from the new retail arm come online. The 1H is historically a weaker period for sales, usually seeing a pick-up coming into the American summer. Sales revenue for the period increased 9.1% on the pcp.

Europe (~48% sales): Changes in French and Belgian regulations along with acceleration in the emerging markets spurred European unit sales, showing continued strong growth (+18% on the pcp). Revenue growth on the pcp was also strongest in the region with +15% growth.

90%

14%

12%

60%

50%

40%

30%

52%

53%

20%

43%

44%

44%

37%

42%

42%

44%

APAC (~9% sales): APAC results remain mixed with slow growth in Japan and South Korea while showing a return to growth after a slow start to the financial year. The region closed the period +5.5% on the pcp in sales revenue.

Figure 7: Revenue by region

$25,000,000

$20,000,000

$15,000,000

$10,000,000

$5,000,000

$0

1H13

2H13

1H14

2H14 1H15 2H15

1H16

2H16

1H17

North America Europe APAC

SOURCES: MORGANS, COMPANY REPORTS

Figure 8: Region by sales mix

100%

15%

9%

10%

10%

9%

8%

9%

80%

70%

33%

33%

45%

54%

48%

48%

46%

47%

48%

10%

0%

1H13

2H13

1H14

2H14

1H15

2H15

1H16

2H16

1H17

North America Europe APAC

SOURCES: MORGANS, COMPANY REPORTS

Somnomed Limited published this content on 23 February 2017 and is solely responsible for the information contained herein.
Distributed by Public, unedited and unaltered, on 09 March 2017 13:15:14 UTC.

Original documenthttps://somnomed.com/au/wp-content/uploads/sites/25/2014/05/AUS_SOM_170223_Sleeping-Beauty.pdf

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