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BMRA: Look For Revenue Rebound With New China Distribution

By Brian Marckx, CFA

Q4 Results
: Change in China Distribution Interrupts Revenue Growth
Biomerica (OTC BB:BMRA) filed their 10-K for the fiscal quarter and year ending May 31, 2013.  For the second straight quarter revenue was below our number with sales in Asia again coming in much softer than anticipated.  Management acknowledged revenue in second half of fiscal 2013 was a disappointment but continues to look for this to turn around.  The relative weakness in Asian sales appears directly related to a change in distributors.  A distribution agreement was consummated with a new distributor in China during fiscal Q4.  Biomerica notes that this distributor has indicated that they expect to increase sales to the same levels as that of the prior distributor.  As a result of the interruption in Asia (which has accounted for ~40% of total revenue), we now model a contraction in revenue in the first half of fiscal 2014 but for sales to show meaningful growth in the back half of the year, reflecting the expectation that sales to the new distributor begin to ramp up towards legacy levels.

Meanwhile, sales in Europe were very strong in Q4 at $1.0 million, reflecting 48% yoy growth and representing 70% (Europe sales typically account for ~40% of total revenue) of total revenue for the quarter.  BMRA noted that increased sales of products not previously purchased in Europe was the reason for the relatively strong European revenue.

Total revenue fell 4.7% yoy (sequentially flat) in Q4 to $1.47 million and was about 19% below our $1.82 million number.  Almost the entire miss was a result of lower than modeled ($267k A vs. $889k E) sales in Asia.  This was partially offset by very strong sales in Europe ($1,030 A vs. $712k E).

Q4 gross margin of 32.7% was also well below our estimate of 41.5%, likely due to the much lower revenue number.  Operating expenses were in-line with our estimates.  Q4 net income and EPS were $44k and $0.01 compared to our $254k and $0.03 estimates.  For the fiscal year, net income and EPS were $537k and $0.07, compared to $548k and $0.08 in fiscal 2012. 

BMRA exited fiscal 2013 with $2.5 million in cash and equivalents, up slightly from $2.3 million at the end of Q3.  Cash used in operating activities was $102k in Q4.  For the full year, cash flow from operating activities was an inflow of $1.4 million.  BMRA remains debt free and the balance sheet remains very strong.  Book value at 5/31/2013 was $5.8 million or $0.78/share compared to $5.5 million or $0.78/share at the end of fiscal 2012.

Maintaining Outlook / Recommendation
We have made some revisions to our model, mostly reflecting the hiccup in revenue as a result in the switch in distribution in China.  We look for revenue to return to long-term growth towards the back half of fiscal 2014.  BMRA also recently penned a new distribution agreement in Mexico and announced their H.Pylori and Parathyroid Hormone tests were approved for sale in Mexico.  The company also expects other new product approvals throughout the current year.

We now look for 2014 revenue and EPS of $7.2 million (+10.5% yoy) and $0.11 and for this to grow to $11.9 million and $0.19 in fiscal 2017.  We are maintaining our Outperform rating.  Our fundamental outlook remains unchanged and highly positive.  We have moved our per share price target from $2.70 to $2.50, reflecting both changes in comparable valuations as well as some slight downward revisions to our model - mostly related to the near-term.

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