Pro Medicus: Growth continues but priced in
About the author:
- Author name:
- By Iain Wilkie
- Job title:
- Research Analyst
- Date posted:
- 19 August 2021, 10:00 AM
- Sectors Covered:
- Healthcare and Life Sciences
- PME recorded another year of strong growth across all metrics although lower than our forecasts and consensus expectations.
- While a ~7% miss on our revenue forecasts, strong EBITDA margins were really a standout, with a 735bp improvement – far exceeding our 335bp assumed uplift.
- While the results were strong, we view the company as fully priced based on expected short-term earnings growth and a normalisation of the marketing and promotional costs in FY22 and beyond.
- We have rolled forward our model and input FY21 financials which feed into a number of our growth assumptions.
- Our price target increases marginally although we continue to advocate holders with outsized positions to trim into the strength. Target price (login to view), Reduce recommendation retained purely on valuation grounds.
FY21 results: Miss on major metrics but margin tailwinds provide lift
PME delivered a strong result with NPAT up 33.7% to A$30.8m, albeit below our forecasts (A$33.8m) and consensus (A$31.4m).
Revenues grew 19.5% to A$67.9m (MorgansF A$73.2m) with 16% gains in transaction revenues, 3.7% gains in support fees, and 31% increase in professional services and the addition of archive data migration. With significant revenue growth across North America, Australia and Europe (up 18.0%, 23.4% and 25.7% respectively).
EBITDA rose 35.3% to $50.1m ( MorgansF A$51.1m) and NPAT increased 33.7% to A$30.9m (MorgansF A$33.8m). Main drivers were volumes returning to pre COVID levels, full year contributions from a number of large contracts signed in FY19, and substantially lower marketing and travel expenses with major conferences being held virtually.
Cashflow conversion remains strong, with 23.6% growth to A$38.4m (from A$31.4m). Balance sheet remains solid with A$64.9m in cash and investments (pcp: A$43.4m) and remains debt free. A final dividend of 8cps (+2cps on pcp) was declared (15cps for full year up 25%).
Analysis: extraordinary year for new contracts
Clearly an extraordinary year in terms of new contract generation and rebound in imaging volumes as global lockdowns ease and the shift towards cloud has PME at a competitive advantage given Visage 7 was built to be cloud-native.
Notably PME has signed research collaboration agreements with NYU Langone Health and Mayo Clinic; as well as gaining FDA approval for the company’s Breast Density AI Algorithm in February which they will continue to build out in the space.
Margins continue to expand, although we expect the margins seen in FY21 to be less pronounced in FY22 as in-person trade shows and conference costs recommence.
Forecast and valuation update
PME have provided no FY22 guidance but given strength in FY21 sales believe there is a strong foundation for future increases in exam volumes, and new contracts in the pipeline.
We have rolled forward our model which increases our valuation to (login to view).
Investment view: upside priced in
Over the year, PME has won seven new contracts in its space adding a total contract value of A$147m over 7 years. The five-year contracted revenue base sits at an impressive A$320m (up from A$210m in pcp).
With the stock now sitting on ~220x/154x FY21/22 PE, we view the material upside as already priced in and look for weakness before adding to positions.
The key downside risk is extended disruptions caused by COVID creating barriers for system implementations and decision making processes.
The key upside is faster adoption of the technology (contracts above our forecast run-rate).
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Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.