Pro Medicus: Aiming for the clouds

About the author:

Iain Wilkie
Author name:
By Iain Wilkie
Job title:
Research Analyst
Date posted:
17 February 2022, 11:00 AM
Sectors Covered:
Healthcare and Life Sciences

  • Pro Medicus (ASX:PME) recorded another result with strong growth across all metrics, driven by a glut of contracts with full period contributions, new implementations at or ahead of schedule, powering a material step-up in margins.
  • While revenues were in-line with our forecasts, EBIT margins (~65%) was really the standout, with a 600bp improvement versus our expectation of a 100bps decline on the pcp, where we assumed the resumption of major marketing conferences and travel expenses would curb margin growth. We were wrong.
  • Pipeline continues to strengthen in terms of depth as well as mix, while study volumes in the key US clients strengthen and at or above pre-pandemic levels.
  • Really nothing to fault in the result and provided a healthy beat across our profit expectations. Post the result, it is clear we have underestimated the operating leverage even as key expense lines resume which forms the basis of our slight upgrade. Over time we continue to forecast these margins to extend up to 80%.
  • As a result of our changes, our price target increases to (login to view) and view current prices as strong entry point with multi-year contracted revenue base providing earnings support and strong thematic tailwinds. Add retained.

1H21 results: margin expansion shines

PME delivered a strong result with NPAT up 52.7% to A$20.7m, above our forecasts (A$18.6m) and consensus (A$18.5m).

Revenues grew 40.3% to A$44.3m (MorgansF: A$44.8m) largely driven by a 54% gain in licensing revenues as recent contracts go-live, while smaller gains across support fees (+7.5%), a flat professional services line, and a A$1.35m capital sale in-line with the extension of the German government contract.

EBIT rose 61% to $29.1m (MorgansF: A$26.0m), demonstrating high operating leverage with EBIT margins expanding to 65% (59% in the pcp). Main drivers were volumes returning to pre COVID levels, full-term contributions from a number of large contracts signed in FY21, yet only partially offset by incremental expense growth, including the return of the major (and largest non-salary) expense line with in-person conferences back on the agenda. 

Cashflow conversion remains strong, with 29.6% growth to A$27.0m (from A$16.9m). Balance sheet continues to strengthen with A$76.2m in cash and investments (pcp: A$50.9m) and remains debt free. An interim dividend of 10cps (+3cps in pcp) was declared and marginally higher than our forecasts (9.5cps).

Analysis: Contracted revenues grow, so does opportunity in Cloud

The result was really just a demonstration of PME’s ability to efficiently onboard and implement new clients. Clearly, FY21 was an extraordinary year in terms of new contract generation, which are quickly coming into fruition. 

Interestingly although not surprising, PME continue to see a marked shift towards cloud with all five of the last contracts won being cloud offerings. Mgmt also noted a significant increase in new tenders being off-premise only. This is likely to place the Company at a significant competitive advantage.

Importantly, the pipeline of contracts remains very strong and continues to grow not only in depth but also across customer type (mix of academic, IDN, corporate, and private market tenders out to market).

Looking ahead, forward contracted revenue continues to strengthen, now sitting at A$382m over the next five years.

Forecast and valuation update

We view our revenue model remains on track, although marginally moderate a number of expense growth assumptions lower than the quantum of step-up we expected.

As a result, our DCF valuation increases to (login to view).

Investment view

Post the recent correction across high growth names, we view current prices as a solid entry point. The business has never been in better shape with a growing pipeline, higher baseline earnings support, and strong structural tailwinds.

Risks

The key downside risk is extended disruptions caused by COVID-19 creating barriers for system implementations and decision making processes.

Find out more

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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.

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