Recent company commentary paints a clear picture
Monash IVF (MVF) reconfirmed FY19 guidance at its November AGM calling for 1HFY19 to be down 15% on the previous corresponding period (pcp). This implies underlying NPAT of A$10.2m and additional one-off charges of A$0.99m (closure of underperforming Mosman clinic and CEO separation costs) before a recovery in 2HFY19 to be up at least 15% on the pcp implying NPAT of A$10.5m or better.
Management commented that the Australian stimulated cycle market increased by 2.8% in the 1QFY19. MVF's cycles were down 8.0%, although this includes the cycles from the departed Victorian Fertility Specialist. If these cycles are excluded the cycle numbers actually grew by 8.8%.
We have adjusted our forecast underlying NPAT by 4.1% to A$19.9m for FY19 reflecting lower cycle growth of 1% (was 2%) and lower price inflation of 1% (was 2%). One-off charges of A$1.0m see reported NPAT fall by 9.8% to A$19.9m. Modest adjustments to margins see our NPAT forecast reduce by 4.7% for FY20 and by 5.8% for FY21.
What we are thinking
We think competitive pressures from the low cost operator (Healius) are starting to moderate, particularly with the potential takeover bid distracting management from the expansion of the smaller IVF division. MVF has seen a significant disruption over the last 18 months to its business (two changes of CEO, loss of key Victorian doctor, and closure of low-cost operations). However, the IVF business over the last eight years has generated on average A$31m of net operating cashflow per year compared with an average EBITDA of A$39m.
We believe the current share price factors in much of the negative news and sentiment towards the IVF sector. From here we think the downside is limited.
Given forecast changes, our DCF valuation and share price target have been reduced (Morgans clients can login to view). We have also adjusted our market PE multiple to 12x (was 13x) and EBITDA multiple to 7.5x (was 8x). The downside risk comes from greater competition from low-cost operators taking market share from the premium MVF service offering.
Given the fall in the share price we have moved our recommendation from Hold to Add.
Morgans clients can login to view our detailed report and share price target for Monash IVF (MVF). Alternatively, please contact your Morgans adviser or nearest Morgans office for access.
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