Pro Medicus (ASX:PME): Back to Reduce on valuation grounds

About the author:

Iain Wilkie
Author name:
By Iain Wilkie
Job title:
Research Analyst
Date posted:
05 January 2022, 10:30 AM
Sectors Covered:
Healthcare and Life Sciences

  • In this note, we update our recommendation based on recent share price strength, which we view has run ahead of fair value in the short term.
  • While FY22 is positioned to see a marked step-up (~40%) across all metrics with a large number of contracts signed in FY21 now active and billable, we view
    consensus over the next few years as fairly full with estimates set for >30% EPS CAGR growth over the next three years.
  • We continue to view PME as a high quality name with a competitive product and long-term contracted revenues, but remain cautious on short-term valuation
    grounds, trading at 150x FY22F PE.
  • Target price of (login to view) maintained and move to a Reduce recommendation given current prices representing a (login to view) downside to our valuation.

Back to a trim candidate on low volume rally

Trading in the stock continues to be volatile with a large trading range (~40% over the last six months) and increasing short interest (up to 4.1% from 2.4% post FY21 result).

Recent and all-time highs of ~A$70 were achieved post a strong but in-line FY21 result (rally on short-squeeze), pulling back to ~A$50 recently in a broad sell-off in high growth names, and now sitting back above (login to view)

We view current prices as a reasonable opportunity to trim overweight positions ahead of the upcoming 1H22 result, which we view as having increased risks given valuation and consensus expectations of >44% revenue growth and >58% EBIT growth over the prior period.

Forecast and valuation update

No changes to forecasts or valuation.

Investment view

Given the valuation, happy to remain active and trim overweight positions but long-term thematic and earnings visibility remains strong to retain a core holding for the long-term.

Looking for weakness for an entry price around A$50 for new positions.

Risks

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

They 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.

Solid top-line outcome: BAP’s 1Q22 revenue was flat on the pcp, an extremely resilient result given the extent of lockdowns in the period (~70% of stores impacted) and the strength of the pcp (cycling 27% growth). Composition comprised: Trade +2%; NZ -10%; Retail -12%; and Specialist Wholesale +7%. Overall, BAP stated that non-lockdown areas are outperforming expectations. ▪ 1Q22 trade & retail: Trade/Burson revenue was up +2% on the pcp (LFL sales - 1%; cycling 8% pcp); NZ/BNT revenue was down -10% (LFL sales -15%; cycling +4%); and Retail/Autobarn revenue was down -12% (LFL sales -16%; cycling +36%). Within the Retail segment, online sales were +80% on the pcp. Stores percentages impacted by lockdown were: Trade 70%; NZ 100%; and Retail 50%. ▪ Specialist segment results: Specialist wholesale revenue is up 7% on pcp, with Auto electrical/Truckline divisions ‘performing strongly’; and WANO underperforming. ▪ GM pressure expected to be temporary: BAP stated GM was stable across Wholesale and NZ (45% of FY21 revenue); and down ~50bps Trade and Retail (~55% of FY21 revenue), driven by promotional and online pricing in lockdown areas (we assume no margin pressure witnessed in non-lockdown areas). BAP expect margins to revert once lockdowns ease. ▪ The cost base has increased vs pcp, a function of duplicated DC costs (commencement of new VIC DC), and higher group and team member support (covid related) costs. BAP noted FY22 store rollouts and refurbs are on track.

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