Forum Topics PNV PNV PNV valuation

Pinned valuation:

Added a month ago

October 23

Given Polynovo was a popular topic of conversation yesterday at the Brisbane meetup, I thought I might share my valuation methodology for some feedback after updating for FY23 numbers.

My valuation is based the following assumptions:

  • Cost per employee and other expenses as a percentage of revenue are relatively stable.
  • Gross margin of 85%. Is this correct/conservative?
  • I am conservatively (or maybe not??) assuming the growth isn't going to continue or accelerate from current position.
  • R+D of $5-6mil a year.
  • Assuming a PE40 in FY28 with 15% discount rate (required return). In all cases this gives a PEG of less than 2.
  • Additional 70 employees a year to create the growth.

The two major factors contributing to the profitability of Polynovo and hence my valuation after the above assumptions are:

  • The increase in revenue over time
  • The extra cost of the additional employees which enables the revenue growth.

I'll start with where I get my numbers from. The table below extracts the % in comparison to revenues from previous years to be able to make the assumptions going forward:


My base, stretch and bear cases are below, orange cells are inputs with the highlighted yellow being the discounted back valuation. My final valuation is the average of the three at $2.19.




Would be extremely interested in any feedback and thoughts on the above! Models are never correct and my model above is somewhat simplistic. When I do the numbers in the way I have Polynovo looks like a potential cash printer but I don't know if my numbers further down the line are a bit too optimistic!

a month ago

Hi @Dominator

Have you considered the investment required through the balance sheet? Working capital runs at 15%-20% of revenue. You've scaled the D&A expense as the company grows, but remember D&A only starts after you have acquired (paid for) the assets. It looks as though implicit in your D&A expense assumption is an ongoing growth capex requirement that looks similar to the setup at the moment where PP&E is ~18% of revenue. Taken together these are two fairly significant items – ie growth is not free even for cap light businesses. And that's before competition, inertia etc enter the value picture. Obviously if your estimates play out then this is all academic and the business won't need cash or will have no problem raising debt or equity cheaply.

But, following on from that, I'm a cheapskate, so your bear case looks like my stretch case. I'm not sure a bear case that doesn't include any further need to raise capital, has revenue growth of 600% over the next 7 years with high single digit EBIT margins rising to 20%+ and an ending PE of 40x is...bearish. That to me would be what an absolute killer company looks like.

I haven't done as much work on PNV as you have. I have put it in the too expensive basket a while back and haven't really followed it too closely so all of this is just rubbery thoughts.



a month ago

Thanks @UlladullaDave. All good points. Looks like I need to go back to the drawing board if I want to make a proper model of the business especially so far out into the future given yours and others feedback.

I see now my numbers are far too optimistic. A thesis in PNV at anywhere near current prices must assume substantial sustained growth and faith that management is heavily invested in making PNV a compounder from here. PNV is an easy one to put in the too hard basket as a result and I probably would have when I started out a couple of years ago. This is my first investment into a hyper growth company so I'm sure some lessons will be learnt... Hopefully not bad ones, again only a small position at the moment but will not be looking to increase in size after some of the extremely helpful points made in this conversation.

a month ago

Hi @Dominator Its interesting that your average valuation is $2.19. Compares with $2.00 for my latest (range of $1.63 - $3.30 across a range of scenarios).

If I take one of my central scenarios, which is closest to you average, I have $2.16 and I'll respond to your assumptions referring to that case, for simplicity.

Cost per employee:

I break these out into Sales and Marketing and non-Sales and Marketing.

In Sales and Marketing there is a big dependency on where the sales is coming from. For example, USA, EU and ANY sales reps are typically $160k/FTE(fully-loaded), whereas in developing markets like India its much lower, so I've assumed $40k/FTE, but developing markets are likely to inflate more rapidly.

Non-Sales and Marketing Staff are skewed by high management costs and I have a starting point here of $269k/FTE.

I've triangulated the total wage bill off recent headcount and wages reports in the Annual Reports.

Although R&D will (and should grow) rapidly, overhead costs should scale more slowly than sales, so this is one source of operating leverage.

I can't tell you precisely how $/FTE scales in my model, because my approach is to scale G&A and R&D as absolute costs over time.

Gross Margin

Historically, Gross Margins have been mid 90%. Its an incredibly capital-light product - almost unique in medical devices.

I have the starting point for %GM at 95%, falling to 91% when the new facilities come onstream.

I end up with %GM in 2030 at 92.5%, as by that time the new facilities are almost full. However, this is a weakness in my methodology. I do not explicitly allow for the impact of lower prices in emerging markets to feed into %GM. (To be corrected in my next update in March)

However, I am OK with this "error" because in my model, emerging market revenues only account for $47m of reveue vs $333m in developed markets.

So, your model assumes a significantly lower %GM than I think they can achieve. This is why we get similar valuations, even through your revenue growth is much stronger than mine (see below).

Revenue Growth

I agree with you. Growth will not accelerate from here. It I though it would, I would mortgage my house and go all in!

You are more agressive on revenue growth than I am.

Your Base annual revenue progression to FY24 and beyond is, with mine shown in the next line:

60%, 50%, 40%, 35%, 30%, 25%, 25% landing at $613m in 2030

54%, 31%, 27%, 25%, 23%, 21%, 20% landing at $380m in 2030


We have differnent approaches. I think they will spend a lot more to expand applications.

So I have then starting at $9.3m in FY24 and growing to $36m in FY30, although as a % of revenue I am going from 14% down to 9.5%.

Employee Growth

My total FTE in 2030 is 665, so I've been adding just under your number. I expect I am adding more earlier on and fewer later, as headoffice and R&D reach scale.

On P/E ratios

Our approaches are different, as mine is a DCF. But when I backsolve my model, I get a P/E in 2030 of 24.

Hope that helps. Of course we can all get whatever numbers we like, but the great thing about modelling is that it builds understanding of what's important and risk-reward.


a month ago

@mikebrisy thanks for taking the time to compare.

My model is very simple, and I am using a high discount rate/return hurdle of 15% which does require significant growth and therefore will not be accurate longer term, FY28 is a push and FY30 is a complete fantasy in terms of accuracy. I just needed to make something to understand what needs to happen for the investment to pay off.

Agree as to why our numbers come out in a similar band because we have different offsetting factors, my model has a higher revenue growth (which probably goes too far) and lower R+D but this is offset by lower GM, higher wages and higher corporate costs while comparatively you have less revenue growth but higher margins and lower costs except for R+D spend. Maybe a different discount rate as well?

Your comparison to my model has helped highlight to me what I think might be some important factors/KPIs in PNV profitability being achieved:

  • Revenue growth. The most crucial factor, without this the company can't gain operating leverage.
  • Over time improving revenue to (costs of goods + employee expense) ratio - IE US = high revenue but high employee cost, where India = lower revenue but lower employee cost. What matters is how much profit PNV makes for every dollar spent on the salesperson + the cost of goods and that this continues to increase over time.
  • In saying the above, GM needs to remain very high and constant.
  • R+D lowers as a % of revenue over time.
  • Overheads need to trend downwards as a % of revenue over time.


a month ago

Ah, 15% discount is the big difference. My DCF uses a WACC of 11%. Now it makes sense why your much higher revenues deliver a similar valuation. The difference in %GM couldn't explain it.

FWIV my highest case (Val=$3.62) has revenue growth of 66% progressively declining to 25%, yielding revenue of $564m in 2030.

I strongly agree with your second bullet point - focusing on the contribution margin from Sales and Marketing as well as Revenue are the key metrics to track. RoW is going to be opaque, but as long as they continue reporting USA as standalone, we should get early warning on how its tracking.


@Dominator I'm no expert on PNV, and i think this is where qualitative and quantitative aspects become important. If PNV 10X rev and moves from ebit losses to enormous profits, it will be another PME, maybe better. that is amongst the best-performing shares on the exchange- ever. of course, it depends on the likelihood that their product dominates (excuse the pun) the competition. is their product 10X better than the competition? thats the question i would i said im no expert


a month ago

@Solvetheriddle thankyou, very good point, the thesis for buying PNV needs to include that it becomes a top 1 percenter on the ASX. I do think PNV is the most likely to be the winner in the field but there is a lot of competition or potentially multiple winners. Even if they do win, this doesnt guarantee high returns for holders. PNV is a high risk holding and not one of my larger positions.

I was trying to find the "what's baked in"/"what has to happen" by doing this valuation. I know this is very simple way of looking at the valuation, but PNV needs to be making around $50m profit by FY28 on a PE of 40 to justify its current price. Real profitability must come in the next couple years for this to realistically be achieved. I do find it hard to put numbers for growth in that are so high relative to other companies but compared to current PNV growth rates (which I don't believe are sustainable on % terms) they are lower. I guess that same issue happens with any company that maintained strong growth over a long period time. I can see the revenue tapering off above the $500m mark.

a month ago

I missed the note on the Brisbane catchup - I'm based here and be keen to catchup with Strawfolk next time...