Australia | Feb 18 2020
Pro Medicus continues to invest heavily in R&D and, over the next 2-3 years, should generate revenue from new areas such as ophthalmology and cardiology.
-Visage 7 likely to increase the chance of winning new contracts
-Increased network effect from growing customer base in North America
-Valuation the main stumbling block for brokers
By Eva Brocklehurst
Imaging technology provider Pro Medicus ((PME)) is well set to capitalise on the increasing number of contracts in major health centres moving to the cloud. The company continues to invest heavily in R&D and over the next 2-3 years the investment is expected to generate revenue from new areas such as ophthalmology and cardiology.
Revenue was $29.4m in the first half and underlying net profit $12.1m. The results benefited from significant US contracts including a full contribution from Mercy Health as well as first revenue from Partners Health, the company's largest contract to date.
Revenue from Europe cycled a $4.2m capital sale from an expanded German hospital contract in the previous corresponding period. Excluding this, revenue was up 52% in Europe. Australian revenue was up 21.5%. US revenue was up 43.1%, and in the second half is expected to benefit from new contracts.
The only revenue segment that did not increase was professional services. This segment is largely driven by installations and revenue is now spread over the length of the contract rather than been recognised at the time of the installation.
Bell Potter notes this change of accounting has the effect of lowering revenue recognition in the short term but will become less volatile going forward. Contracted revenue continues to grow, now projected at $195m over five years.
Pro Medicus provided no quantified guidance but indicated it was generating an increased network effect from its growing customer base in North America. Moelis understands a number of new contracts are entering the tender pipeline and backs management's ability to continue winning new contracts.
UBS notes enterprise imaging offerings are becoming mainstream, although many offerings from major market operators appear to be consolidated point solutions, rather than a uniform platform. This supports ProMedicus' take easing market position although, large contract are required to minimise the earnings risks into FY21.
The transition to the cloud as a competitive advantage for the company. Within the current tender pipeline around 40% of the contracts are looking for cloud-based delivery. Morgans notes the company has broadened its offering to appeal to other departments within the hospital.
With the Visage 7 streaming technology the ability to provide proof-of-concept is likely to increase Pro Medicus chance of winning new contracts. Expansion into cardiology and ophthalmology are opportunities that are likely to be more for the medium term, Moelis asserts, as this will likely depend on the timing of renewal of existing hospital software contracts.
The broker has a Hold rating and $27.65 target, continuing to observe the company is exceptionally well-managed with a high-quality product. UBS, which has a Neutral rating and $29.30 target, agrees new opportunities present upside but considers the risks for the stock evenly balanced.
While earnings margins were strong, at 51%, they were below expectations and UBS tempers forecasts as a result. Also while positive about the medium-term outlook, the broker considers valuation a limiting factor.
Morgans accepts the share price has been volatile and while some investors may baulk at the current valuation, believes the company can continue to grow comfortably over the next few years. The main risks to its target, set at $32.47, is the timing and scale of new contracts and the potential for large radiology practices to internalise systems development. Morgans maintains an Add rating.
While acknowledging the company is well-positioned to capitalise on future growth opportunities, given the recent rally in the share price, Bell Potter downgrades to Hold from Buy with a target of $30.
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