Pro Medicus (ASX:PME): Back to Reduce on valuation grounds
About the author:
- 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.
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.
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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