WIth the currently Share Price (SP) of PNV moving upwards, I'm trying to work out what to do with PNV.

Given the reduction in PNV short position since Dec 2024....I think the key questions are:

• Do we think the short position will continue to be reduced?
• To what level?
• How long will that take?
• What other buying momentum might happen along the way?
• What will happen after the funds stop reducing their short position?
• What are the factors that might push the SP down at this point?
• What are the factors that might hold or push up the SP at this point.

The following is a bit of a ramble to answer the above questions:

The short position has reduced from about 4.5% (SP $1.50 Mid Dec 2023 approx) to 3.5% (Current SP $2.40 Mid Mar 2024 approx). Unlikely to see the short position go down past 2.5%. (Keen if someone has a view on this). But not all the SP movement upwards since Dec 2023 is due to the shorts buying on the market and reducing their position. We have had a bunch of great news from PNV.

However, if the short position is to drop back to about 2.5% than means about 7 million shares to be bought back. Daily PNV volumes sit at about an average of 1.5 million shares traded a day. So assuming the shorts buy back about 200,000 shares a day....that is 35 trading days to reduce their position....So in about mid May the SP could be at about $3:00 - 3.50? Do we think that volume of trades per day is likley to provide much upward momentum? Maybe just a little? It is more likely that people are starting to recognise PNV as a great investment?

I have had a look at what happened around the last big short squeeze during the last half of 2020. And I think that set of events and where PNV is now compared to then....means it is not that relevant. PNV had loads of head winds with COVID, ASX200 games being played, change of CEO etc. And now PNV turns a profit, growing massively etc. And the other smaller squeeze in 2022....that to me was the ASX200 games being played and the market didn't have consistent data on revenue. So again very different to now.

When the shorts stop buying back...will that have an effect on SP? Well it will cease that small tailwind effect.

In terms of future SP catalysts (positive and negative). I think once more news/orders from India appear that will be a positive. $10m month revenue figure will be a positive. Potential negatives could be cost blow out on the new production facility (but we would not likley hear about that for at least 9-12 months).

Conclusion:

When i started to write this straw....I was convinced we were in a small short squeeze. But now i don't think so...just some tail wind being added to the general positive momentum upwards for the SP.

BUT - As many of us have modelled, a valuation of about $2.50 seems fair. And at what point do we start to see PNV as overvalued and start to sell/trim our PNV positions?

John Parkinson

Note: I have also posted this on HotCopper to see what the chartists and others think...there are some HC members with great access to professional trading screens etc. But so far I have not got any great insights...

I just had a look at the current PNV short position.

Since Dec 2023 it has dropped from about 4.5% to 3.5%.

I would imagine it will fall back to about 2.5% in the next few weeks.

So that means about 7 million shares to be bought back.

Who are PolyNovo?

• Melbourne based medical product company.
• Produce a synthetic “lattice” product for burns/skin repair.
• Works extremely well and Doctors are loving the product and finding more and more uses. 
• PNV R&D team working and validating more and more uses. 
• High margin product. This is obviously a high guarded secret. But in my research, I have heard people throw out 90% etc. I don’t know and can’t confirm, but I do know that compared to it’s competitors who use a different type of product (Integra - pig skin), the margins are best in the field. 

Management:

• Mr. Swami Raote – Current CEO – Ex senior exec in Johnson and Johnson. He is Indian and knows the Indian market well. India has the highest burn rates in the world. 
• Mr. David Williams – Current Chairman - Holds a large portion of PNV shares, worked in mergers/acquisitions for years, also tells the company story well and keeps the market well informed. Loves a red wine I hear and the Flower Drum in Melbourne. 

Growth/Regions:

• PNV did a capital raise at $1.90 in late Dec 2022, to fund growth through expanding production, setting up new teams, and expanding existing teams globally.
• Currently USA is cash flow positive and growing (said by David Williams in last Revenue discussion).
• India has just been established in early 2023….highest burn rates in the world…and low cost for employees/sales staff. Yet to see sales data for this move. 
• Europe has many contracts in place with existing distributors. These are being monitored for performance. My view is they are underperforming. And I think when more revenue is being made in 2024….a European PNV team will be established. 
• Australia/NZ has much of the head office/manufacturing/R&D team. But the Sales Staff are also increasing and gaining traction/revenue.
• On Wednesday 23 August 2023 (2pm), PNV will be doing an announcement of revenue. It is expected to be a record month/year. I hope they provide some more details on the revenue splits between regions etc. 

Valuation:

• To predict sales revenue, I believe the number of Sales Staffs should provide a pretty good coloration with revenue. I also have heard on some of the meetings, the Macquarie Bank analyst keep pushing management to divulge sales staff information. 
• David Williams (chairman) has previously said it takes about 6-12 months for a new sales staff member to start paying for themselves with sales. So there tends to be a lag between sales staff being appointed and revenue uplift. I have tried to simplify by just using the previous year’s staffing levels to determine a Revenue per Sales Staff.
• For 2023 PNV should generate about $100m in revenue ( I will update this post 23 August 2023). And in 2022 they had 152 staff globally (Page 6 of 2022 Annual Report). 
• I think approx. 80 of them are Sales Staff. 
• I think approx. 26 are management/support staff
• I think approx. 5 are R&D
• 5 are Directors
• I think approx. 10 are factory workers
• The rest are estimates of equivalent staff in their distributors (Europe etc)
• So I calculate that each Sales Staff generates about $1.2m in sales. However, on closer inspection, I understand that a large chunk of those sales staff came on in early 2023. So they may have generated more revenue earlier. I would thus guesstimate that each Sales Staff would generate approx. $900k per year. (they would cost PNV about $200k a year, so they would net PNV about $700k per year.)
• I have then created a spreadsheet with each country/region and likely Sales staff numbers for the next few years and tried to map out the expansion and thus future revenue. 

• So if we use the net revenue assumption of $700k per sales staff per year, and multiply by the previous year Sale Staff numbers we get the following revenue estimate:
• I think that maybe this model/assumptions are generating net revenues a little too high and I will re cut the model once new data is available post 23 August 2023. But for this straw…lets keep going. 
• I then looked forward 10 years and inserted a slowdown in the Sales Staff recruitment over another 6 years. So that we have a 10 year view. 
• Then I did an NPV at 5 and 10% discount rate (seems this is about right for a medical device company). 

• So the NPV for 10 years of revenue ranges between $1.3 – 1.8 billion. If that is considered the Market Cap…that would mean a SP of $2.00-2.60. Current SP is about $1.55. 
• I will continue to update my staffing/revenue model as new information is presented. Possible other sources of info could be job adverts in different regions etc. 

Growth Opportunities:

• PNV’s largest competitor is Integra. They use animal skin for skin transplants. They were doing approx. $1.5b in revenue in 2022. However, around June 2023, they had to recall all their products because the FDA (US regulator) found unacceptable levels of bacteria in their products. It will be at least 6 months before they can begin to produce new products and there is also a question mark if they can actually produce their product without this bacteria. This is a massive opportunity for PNV. It is unlikely the last revenue announcement (which was a record of $7m for a month), could have any sale attributable to the demise of Integra. But the upcoming revenue announcement tomorrow 23 August 2023, should have some revenue attributable to the Integra demise. I also think, that once Doctors use the BTM product from PNV, they are not likely to go back to Integra. 
• PNV are finding more and more uses for their product. So I think any money spent on their R&D is valuable. And the Sales Staff will then earn more per person because they have more products to sell on each visit to each hospital. 
• I also think that in 5 years, a large chunk of the profit that was going into growth (ie more Sales Staff), can be invested into complementary acquisitions. PNV will have a sales force with relationships, and can easily add other complimentary products. And that revenue can generate further growth. Akin to CSL. 

Takeover:

• There has always been talk of a Johnson and Johnson type company buying PNV. 
• I think this is a distinct possibility. 
• I think a J&J would value the new products that will come from the PNV R&D area. 
• Also the CEO is ex J&J and I’m sure that there would have been discussions. Or will be soon. 
• People throw prices out there…but I think the board would be unlikely to recommend selling for anything less than a SP of $3-4. 

SP history:

• PNV has had a roller coaster SP over the last few years. 
• There have been a number of events/explanations for this:
• Loss of CEO
• Covid massively stopping sales and growth.
• PNV sitting just in and out of the ASX200 meaning lots of funds buying or selling.
• Shorters taking advantage of the above.
• Recently, PNV has experienced shorting from about $2.70 down to $1.30. But with the latest revenue announcement (record $7m month) has sat around $1.50. 
• ]If the next announcement is positive regarding revenue, then I expect a jump in SP. Given the shorters having been working this stock hard, and if they still think it may fall out of the ASX200…then they may try to hold the SP down. 
• But in the longer term, with revenue continuing to rise, the shorters will reduce their positions and the SP should become steady. 

Conclusion:

• I think PNV will continue to achieve it’s growth strategy and see revenue continue to grow globally for it’s existing products. 
• I think PNV will continue to add new products which will expand it’s revenue.
• I think PNV is currently undervalue at $1.50 (22 August 2023) and should move up to about $2.20 by the early 2024.