Nightingale Health H2'24: World conquest is on a better track

Translation: Original comment published in Finnish on 9/23/2023 at 9:01 am EEST

Nightingale has already launched around ten growth starts, mostly with prominent healthcare operators. The strength of demand and speed of progress has surprised us positively in the short term, and we believe the company’s value has taken a clear step forward with the development. The business direction is promising and we expect good news on the customer and regulatory front to continue. However, we believe that the increased value is already priced in the share, remain on the look out for better risk/reward ratio for a one year horizon. In line with our updated neutral scenario, we raise our target price to EUR 2.9 (was EUR 1.6) and reiterate our Reduce recommendation.

Recent strong news flow indicates that the company has selected the correct strategic path

With the successful start of Terveystalo’s occupational health cooperation, Nightingale’s revenue for fiscal H2’24 (1-6/2024) grew by 35% to 2.6 MEUR while other customers are in an earlier stage. As expected, profitability was clearly in the red, but cash consumption (about 6 MEUR/6 months) was controlled and net cash adjusted for lease liabilities was hefty at 65 MEUR at the end of June. Several collaborations signed in recent months indicate that market interest in Nightingale's technology is already quite broad, rather than hanging on a few pioneers, so targeting sales efforts to healthcare seems to be a successful strategic choice for the company.

Customer gains have made the forecasts more tangible although risks remain very high

Nightingale aims to integrate its disease risk detection service with the blood sample flows of existing healthcare providers. If successful, the company's revenue would grow strongly and profitability would become positive over time (target: positive EBITDA in the medium term). The company has taken clear steps in this direction: Its technology is already widely used in Terveystalo’s occupational health (01/2024-), will be adopted in Pathology Asia in Singapore (~late 2024), and pilots and research projects that precede possible larger-scale use have been started in the US with several prominent actors (Mass General Brigham, Kaiser Permanente, Weill Cornell Medicine, Boston Heart, 23AndMe, and Phenome Health). Forecasting risks have decreased due to the expanding cooperation base (WACC-% 15.9% -> 14.2%) and we raised our long-term forecasts. However, turning customers into revenue seems to take time and our revenue forecasts for the coming years decreased by 25-30%. We believe that our estimates rely on a realistic but very high-risk scenario of Nightingale’s business growth (revenue CAGR 34% in 2024-2034e). This requires successful ramp-up of existing customers and continuous new commercial contracts. The investor must believe in the company’s technology breakthrough and have very long investment horizon for the company while accepting the risk of capital loss.

A better business scenario already supports the valuation, but the price is one step ahead

Nightingale’s fundamental-based valuation is very challenging, as possible scenarios vary between destruction and multiplication of invested capital. With current data, our fair value estimate range for the share is wide, EUR 0.7-6.8 (previous EUR 0.3-5.8), which we raise because the probability of the company's business success now seems better than before. In our opinion, the company’s track record now also supports pricing closer to the midpoint of the range (target price EUR 2.9 per share). The share is priced above our updated neutral scenario, so the risk/reward ratio does not seem attractive on a 12-month horizon and we see more risks of a decreased valuation level in this period. However, we believe that the company should be examined on an investment horizon of several years,  so the stretched valuation can also be overlooked when recognizing the risks.