Pro Medicus: Expensive for a reason

About the author:

Author name:

By Iain Wilkie

Job title:

Research Analyst

Date posted:

18 August 2022, 4:00 PM

Sectors Covered:

Healthcare and Life Sciences

• Pro Medicus (ASX:PME) recorded another year of strong growth across all metrics with the key highlight being further EBIT margin expansion to 67% well above expectations, highlighting the operating leverage of the business.
• Outlook remains as strong as ever, highlighted by an increasing number of requests for tender proposals and more renewals from existing customers. The five-year forward contract value is up 31% to A$420m.
• Our price target increases marginally to (login to view) and we retain an Add recommendation.

FY22 results

PME delivered another strong result with NPAT up 44% to A$44.4m, albeit below our forecasts (A$46.7m) due to higher taxation charges than forecast.

Revenues grew 38% to A$93.5m (MorgansF A$94.3m, Cons: A$93.4m) with 65% gains in transaction revenues, 5% gains in support fees, and 8% bump in professional service fees. 5-year forward contract value rises 31% to A$420m.

Average study volumes are back above pre COVID levels, and full year contributions from several large contracts signed in FY21 drove the outsized result.

EBIT growth was once again the highlight, rising 46.4% to $62.4m (MorgansF: A$60.6m, Cons: A$61.6m). The 67% margin was a 400bps improvement on the pcp, with a 32% growth in OpEx due to further investment new products / people as well as increases to marketing and travel expenses unable to outstrip exam volume growth.

Operating cashflow remains strong, with 58% growth to A$61.6m (from A$38.9m). Balance sheet remains solid with A$63.7m in cash and investments (pcp: A$42.0m) and remains debt free. A final dividend of 12cps (+4cps on pcp) was declared (22 cps for full year, up 47%).

Analysis

Strong result and another demonstration of the operating leverage within the business. OpEx base likely heading higher with more boots on the ground and in the lab but won’t keep up pace with revenue growth. Will keep heading higher. 

In what is becoming abundantly clear, activity in the Integrated Delivery Network (IDN) market presents a large opportunity for PME. Firstly, this is a natural progression as technology filters down from the luminary teaching systems into the broader sector, and secondly as there is a shift to decentralisation of radiology workforces.

Being cloud-native and having superior study recall speed gives it a clear advantage over disparate and high-volume networks. This fits squarely in one of our key themes in the sector “hospitals without walls”. 

Another strong year in terms of new contract generation with A$100m in new TCV / A$13.7m ARR, plus a slew of upsized contract renewals (A$47m versus prior contract value of A$28m).

These recent contract renewals represented a key insight into the underlying growth of these contracts (either through pricing power, volume growth, or consolidation), growing at ~6-7% CAGR. With a swathe of contracts coming up for renewal over the next few years, we see this as likely another point of optimism.

Forecast and valuation update

Only a handful of modelling changes including rolling through a higher tax rate going forward and broad expense growth assumptions (from 10% to 15%) as a proxy for higher inflation risks to the cost base.

Rolling forward our model based on FY22 results, our DCF valuation increases marginally to (login to view) and we retain an Add recommendation.

Investment view

It’s an impressive story, and one which we view with longevity. While currently fairly priced, we continue to view this as a strong long-term growth story which will continue to grow into its high multiple. Buyers on any weakness – it’s typically short-lived.

Risks

The key downside risk is prolonged delays in securing new contracts and loss of large customer contracts approaching renewal.

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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.