Australia | Aug 27 2014
– IVF growth falls short of prospectus
– Diversity provides relief
– Solid growth forecasts
– Selling overdone
By Greg Peel
Virtus Health ((VRT)) is best known for offering assisted reproductive services (IVF) in Australia, Ireland and, more recently, Singapore, through its chain of “The Fertility Centre” clinics. The company nevertheless also offers day surgery and diagnostic services.
Virtus listed on the ASX in July last year and yesterday posted its maiden full-year earnings report as a listed company. The stock took off after listing to become an immediate star before posting a disappointing first half earnings result, from which its share price ultimately recovered. Yesterday’s result was nevertheless another disappointment.
Heading into the result, the market had already started to worry again about this potential high-flyer when Primary Health Care ((PRY)), largely a medical centres and pathology services franchise, announced it was also entering into the IVF game in NSW. This is not a good time for Virtus to be “missing” on its full-year result.
VRT dropped close to 4% yesterday and is down again today as we speak, around the $7.70 mark. The stock opened on Monday at $8.20 and had peaked at around $9.00 post offering late last year. Is the game up for this star debutant?
No, say Macquarie and UBS.
Macquarie was not surprised Virtus fell short of the IVF cycle growth guidance provided in its prospectus, given industry trends have been running at a lower rate. As it was, Virtus still posted 3.9% growth against 2.9% industry growth, but the “miss” is what the market homed in on. Indeed, the result fell short of Macquarie’s numbers on all of profit, revenue and earnings, but then the broker was caught out by higher than expected interest and tax expense.
The result was in line with UBS’ forecasts, highlighting the benefits of what the broker calls the “portfolio effect”. As noted, Virtus also dabbles in day surgery, which saw 9.4% growth, and diagnostics, which saw 17.5% growth. And further diversification is provided geographically. Margins were weighed down in FY14 by the cost of the company’s expansion, but while Virtus is still pursuing M&A opportunities in the UK and EU, the broker expects margins to at least stabilise in FY15 as the company begins to transition from this expansionary period.
Brokers concede the Primary effect will likely continue to weigh on market sentiment, even though there is a demographical disparity to consider. Virtus provides full service to the higher end of the IVF cohort – those couples who can afford to pay for more than one cycle until a result is achieved – while Primary has come in at the low end, bulk-billing couples who can really only afford to give it one shot, so to speak. Indeed, early data from Primary indicates that of 80% of candidates have tried IVF and have either failed or run out of money, while 20% are new quartile and unlikely to impact on Virtus.
Indeed, on the basis that any advertising of medical services “floats all boats”, Virtus noted a pick-up in its own enquiries when the news hit the headlines of Primary’s new bulk-bill service, UBS notes. Macquarie nevertheless warns that full service volumes and subsequent Virtus price increases may still come under pressure from the aggressive new competitor.
UBS’ response to the Virtus result is to lower its price target to $9.50 from $9.75, but the broker maintains a Buy rating on the back of a forecast compound annual earnings growth rate over three years of 14.7%, a 70% or more premium to the All Industrials average, and the fact the stock’s PE multiple has now fallen well below its peak. UBS believes competition concerns are overdone and FY15 prospects are underappreciated.
Macquarie has looked past the disappointment of the prospectus “miss”, having expected this anyway, and highlights 7% organic sales growth in FY14 and 10% organic earnings growth. Throw in a 3.4% yield on the announced dividend, fully franked, and the broker suggests a 16.5x forward PE looks attractive, and thus maintains Outperform.
UBS and Macquarie are the only two FNArena database brokers who have initiated coverage on Virtus to date, so it’s two from two Buy (or equivalent) ratings. Macquarie has “rolled forward” its discounted cash flow valuation (added FY17 now FY14 is in the bag) which leads to a target price increase to $10.30 from $9.80, leaving a consensus of $9.90.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
