Small Caps | Apr 05 2016
This story features PRO MEDICUS LIMITED. For more info SHARE ANALYSIS: PME
-Key US health care system
-Earnings estimates up by 10%
-Margins of 40% expected in FY18
By Eva Brocklehurst
Pro Medicus ((PME)) has won a large, long-term contract to roll out its medical imaging software. This time it involves the Mercy Health System's 46 facilities in the mid west of the US. Mercy Health is the seventh largest Catholic health care system in the country.
The seven-year contract has a base value in excess of $21m. The company will receive $3m per year as a minimum over the life of the contract regardless of the number of scans performed. Moelis observes Mercy Health is at the forefront of adopting leading edge technology in the US, having been the first to adopt an electronic health records system which is now ubiquitous throughout the US.
Pro Medicus' technology provides detailed scans at high speed to the medical fraternity in hospitals and radiology clinics and Moelis believes the contract with Mercy will support further success going forward. The key to the company's software is the ability to rapidly render scans to be viewed on desktop or mobile devices for diagnosis.
Imaging software extends beyond radiology to cardiology, oncology, neurology and pathology. Meanwhile, the company's practice management software, which is 20% of sales, manages work flow for radiology groups in Australia and Canada.
The company is currently working on tenders for more than ten potential contracts. Moelis observes Pro Medicus has won six out of its last seven tenders over the last two years. A new master agreement with a large healthcare purchasing organisation is also expected to streamline the contracting process with that organisation's membership. The size of the network was not disclosed.
Moelis retains a Buy rating and raises its target to $4.18 from $3.61. Earnings estimates are increased by more than 10% for FY18 and beyond, to reflect the new contract. The broker likes the stock for its long-term recurring revenue stream, which is typically 5-7 years. The contracts are structured to provide guaranteed minimum values, with upside payments if volumes are higher than forecast.
The stock offers a scalable model, with margin leverage. The broker notes margins doubled to 30% in FY16 from 16% in FY14. A margin of 40% is forecast in FY18, assuming more contracts are won over the next two years.
A 3c dividend is forecast for FY16, rising to 4.6c for FY17 and the business remains net cash. Earnings per share growth is forecast at 72% for FY16 and 49% for FY17. Revenue is projected to reach $27.2m in FY16 and $33.2m in FY17.
See also, Pro Medicus Projects Strong Outlook on March 11 2016.
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