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Published to the market and investors on 9^th April 2019 @ 7.07am (BST).

Mauna Kea Technologies
Recommendation: OUTPERFORM
Target Price: EUR4.10
Current Price: EUR1.50 (CoB on 8^th April 2019)

KEY TAKEAWAY

Mauna Kea reported FY2018 total sales of EUR6.8m (1% YoY) with sales of EUR2.1m (37% YoY) in Q4 highlighting the increasing traction for Cellvizio and validating the transition to the new pay-per-use ("PPU") model in the US. Total sales growth was largely driven by a 17% increase in consumables sales, the key performance indicator for PPU, in our view. As we expected, FY2018 revenues from Cellvizio straight sales declined (-13% YoY) as a result of the move to the new sales model, but this decline was offset by an increase in consumables sales and services (6% YoY). Importantly, the company placed 55 new Cellvizio systems under its PPU model in 2018, which represents a 323% increase compared with 2017 and lays a robust foundation for future recurring revenue. We remind investors that low utilisation of PPU systems still represents a main risk, in our view, but we continue to believe that the new PPU model will translate into sustainable future growth. We maintain and reiterate both our OUTPERFORM recommendation and EUR4.10 target price.

Strong Q4 performance expected to carry forward into 2019E

FY2018 results highlight the growing momentum of Cellvizio in the US, suggesting that investments into the commercial infrastructure made throughout 2018 are starting to pay off. The 55 new consignment systems placed throughout 2018 are testimony to the increasing traction and clinical recognition of the system, reflecting the positive momentum for the PPU model that we believe will carry over into 2019E and pave the way for an increasing stream of recurring revenue in the future. The company reported an operating loss for FY2018 of EUR12m (24% YoY) and net loss of EUR12.8m (25%), which was largely due to a 20% and 18% increase in sales & marketing expenses and administrative expenses, respectively, both associated with expansion of the commercial and marketing infrastructure in the US. YE2018 cash stood at EUR8.6m, which should allow the company to fund operations until YE2019E.

Consumables sales in 2018 offset revenue lag associated with PPU model

The 1% overall revenue growth in FY2018 despite a 13% reduction in straight sales shows that Mauna Kea can achieve solid sales with PPU, allowing it to maximise Cellvizio's penetration and installed base growth by removing the barrier to adoption of large upfront costs. The reduction in system straight sales was offset by a 17% increase in consumables sales, emphasising the increasing utilisation of Cellvizio and supported by the fact that consumable reorders and PPU probe orders represented 90% of total consumable probe shipments in FY2018, compared with 81% in 2017. With an expanding installed base and increasing utilisation, Mauna Kea is well-positioned to capitalise on opportunities in new clinical indications such as interventional pulmonology.

Increasing utilisation a key focus for management from 2019

As discussed previously, we believe low utilisation rates of consignment systems pose the biggest risk to sustainable future growth, but we anticipate strong consumables sales growth in 2019E due to revenue realisation from Cellvizio systems installed throughout 2018 and increasing adoption driven by further clinical validation. Furthermore, management have made it a main focus for 2019E to drive utilisation and to further expand its installed base, hence we anticipate accelerating consumable sales growth from 2019E. The company is also continuing to investigate avenues to enter the large interventional pulmonology market, which would add a strong second pillar to Mauna Kea's current gastrointestinal expertise and unlock significant commercial potential.

We maintain and reiterate our target price of EUR4.10

We maintain and reiterate our target price of EUR4.10 per share, which is based on an EV / Sales multiple approach using our EUR25.1m revenue estimate for 2022E, a multiple of 4.0x, a discount rate of 11% and a probability rate of 75%. We continue to believe that Mauna Kea is well-positioned to enter a period of accelerated growth as the new commercial strategy and strong sales infrastructure start to pay off and revenues from systems consigned in 2018 continue to be realised throughout 2019E. We maintain and reiterate both our OUTPERFORM recommendation and EUR4.10 target price.

Kind regards,

Martin Piehlmeier | Analyst

goetzpartners Healthcare Research Team | Research Team

goetzpartners securities Limited

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