Should you sell Polynovo (ASX: PNV) and buy Avita (ASX: AVH)?

This excerpt is taken from Henry's Take where Henry explores whether you should sell Polynovo (ASX: PNV) and buy Avita (ASX: AVH). In any market, you have to compare like with like. When you look at fruit, you hold the apple in your hand and compare it to all the other apples. No use trying to compare it to a pineapple. They are just different. Same with stocks, you need to compare like with like. Polynovo (ASX: PNV) is a stock I have done very well out of in the past. I think I started recommending it around 40c and saw it through to over 200c before leaving the party. As it turned out way too soon as once again this one has gone on a rampage. Now I am not going to cast aspersions on a $2.4bn company that has revenue of $20m in FY20. Polynovo Chart: But spare a thought for poor old Avita (ASX: AVH). The race was neck and neck for a while. One followed the other. Both are in the skin graft business. Slightly different technologies. Spray on rather than a scaffold and PNV has a leg up with Breast implants and hernia treatments which are hard to spray on. We know that CV19 has taken its toll on both but the decision that AVH made to domicile in the US has been like shooting yourself in the foot with a heat-guided missile. When the deal was announced back in April the company share price was around 1000c. Now it has halved. Really? Not sure that was the intention. Is it all about the change in address? Maybe. Maybe we should look at the figures.

• PNV - Sales revenue from NovoSorb BTM continues very strong growth, from $9.3m in FY19 to $19.06m in FY20.

 

• $15m USD committed by BARDA for the pivotal IDE trial

Turning to AVH

• Reported U.S based RECELL® revenue of $5.0m in the first quarter of 2021, a 59% increase over the same quarter prior year
• Total global revenue of $5.1m in the first quarter of 2021, a 56% increase over the same quarter prior year.
• Gross margin was 82% for the first quarter of 2021, compared with 81% in the same quarter last year.
• Cash was $65.8m as of September 30, 2020.

The question is why is PNV valued at $2.4bn and AVH valued at $373m? There is a huge difference and if you look at the chart above the divergence started in April. Coinciding with the move to the US? That is not to say that will be reversed any time soon but there is a case for Buying AVH. Regardless of where it lays its head. The move to domicile in the US was supposed to be a positive. Well, I think we can safely say that the investment bank that came up with that brainwave should be sacked. It has been a disaster for the company.

• Morningstar Research has its fair value at 1219c. Morningstar though is not the best research in the world. It is a default for many brokers to be able to back up a recommendation with some basic numbers and research, so it would be nice to find someone else that looks at the company. Not having much luck in that department. Maybe the US brokers need to.

CONCLUSION Should you sell PNV and buy AVH? Something that is known as a pairs trade. Buy one sell another. AVH needs a catalyst to stop the slide. This article will not be enough. Maybe its worth putting AVH on your radar. Given its low market cap, a takeover could not be ruled out. It looks cheap compared to PNV. Not sure I would be buying PNV up here given the US is back closing down and elective surgery is being put on hold. AVH is a back foot accumulate and one to watch for a chart signal perhaps. There is a third option in Aroa Biosurgery (ARX) – A NZ recent listing and a market cap of similar to AVH “Product sales of $9.0m for the half-year were down 10%, compared to H1 FY20 ($10.0 million). Product sales in the first quarter were impacted by the COVID-19 pandemic, however, the Company has seen an improvement throughout the second quarter, exceeding management’s internal expectations.” Again, worth a look but suspect it needs to unravel some of the IPO stock and exuberance. [activecampaign form=64]