RBC cuts TSO3 to sector perform; PT to $2 from $4.25

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RBC Dominion Securities downgraded TSO3 (TSX:TOS) to “sector perform” from “outperform” and slashed its price target to $2 from $4.25 after the company entered into a new co-distribution agreement with Getinge to sell the VP4 sterilizer directly into the U.S. and Canadian markets. The stock closed at $1.80 on Jan. 25.

Analyst Doug Miehm writes that although his longer-term view on the company and the VP4 is positive, “we believe this new development introduces several unknowns in the near term.”

“While we previously viewed 2018 as a turning point for the company (i.e., driven by VP4 duodenoscope extended claims and increased device placements), we now believe the next six-to-12 months will be a transition period rather than an inflection point as the company revises its commercial plan, which may or may not include Getinge,” he added.

Mr. Miehm said he believes the company is likely to face “higher cash burn (due to inventory repurchase and increased SG&A expenses), revenue volatility (we assume U.S. shipments to Getinge fall to zero in three-to-six months), and heightened focus on device placements.”

Nevertheless, he said channel checks suggest that the device continues to be one of the safest, effective, and most efficient sterilization tools in the market. “We continue to believe the company can derive value from the product, albeit later than some investors were expecting.”