Nexstim: Further evidence of cash flow turnaround

Translation: Original published in Finnish on 12/1/2024 at 7:50 pm EET.

Nexstim's year of surprises continued on Friday when the company announced a new development and distribution cooperation agreement with Germany's Brainlab AG. The agreement will strengthen Nexstim's financial position and improve its performance starting next year. The longer-term outlook will also improve as the partnership builds distribution strength. A more permanent cash flow turnaround seems likely, which will increase the valuation multiples we have accepted for the stock. We raise our recommendation to Accumulate (was Sell) and our target price to EUR 6.2 (was EUR 4.0) on the back of changes in forecasts and a decrease in risk levels. 

Agreement brings distribution power for Nexstim products

The development cooperation agreement concerns Nexstim's diagnostics business, where we understand the companies will integrate Nexstim's pre-surgical brain mapping technology more closely into Brainlab's service offering. Under the distribution agreement, Brainlab will begin distributing certain Nexstim products in Nexstim's existing key markets in the United States and German-speaking Europe, as well as in new markets. With this agreement, we will see the distribution power of Nexstim's products increase both geographically and as a result of Brainlab’s bigger resources. Withdrawing from the current distribution agreements could cause a disruption in revenue, but the guaranteed gross profit of 4 MEUR in 2025 offsets this risk and provides Nexstim with secure growth. Based on the wording of the press release, the guaranteed gross profit may continue beyond 2025, but there is currently no visibility on continuity.

Agreement includes a capital injection and potential further investment, improves Nexstim's financial position

As part of the agreement, Brainlab will make a 1.15 MEUR equity investment in Nexstim at a share price of EUR 4.58. The subscription will increase the number of shares by 250,000 (+3.6%). The investment further supports Nexstim's already strong cash position. The agreement also includes warrants giving Brainlab the right, but not the obligation, to purchase 790,000 shares at a price of EUR 5.0 until March 2027. Upon full exercise of the warrants, Brainlab's ownership in Nexstim would increase to approximately 13%. Under the terms of the agreement, Brainlab will pay Nexstim an upfront payment of 1.0 MEUR. In a separate press release, Nexstim also announced the conversion of a EUR 650,000 convertible bond into shares, which will increase the number of shares by 146,194 (+2%) and reduce debt accordingly.

Forecasts rise as guaranteed income and distribution power increase

Our forecasts for the current year remain unchanged, but the forecasts for the next few years have been raised significantly due to the surprising agreement. The guaranteed gross profit of 4 MEUR will have a positive effect on both the top and bottom line in 2025. We believe the same effect will continue in 2026, although this is not stated with certainty in the release. As distribution power grows, so do our medium-term forecasts.

Cash flow turnaround allows higher valuation

With the forecast changes, we expect Nexstim to achieve a permanent cash flow turnaround, which will increase our accepted EV/S multiple to 3-5x. On this basis, we consider the valuation attractive with a multiple of around 3x based on 2025 projections. The DCF value also indicates the upside potential. We remind you that there is still a lot of binary exposure to the stock through the possible Sinaptica and Magnus Medical contracts.