Company Overview: Virtus Health Limited (ASX: VRT) is in the provisioning of fertility services, medical day procedure services and medical diagnostic services in Australia, Denmark, the UK, Ireland, and Singapore. The company has robust medical collaboration, with ~128 leading fertility specialists, supported by more than 1,300 professional staff globally.

VRT Details

VRT Rides on Geographical Diversification: The company ended FY21 on a decent note, with robust performance across all its services - internationally and in Australia. The company’s growth strategies involve enhanced focus on delivering robust patient outcomes by strengthening its One Lab and One Clinic approach, creating a Centre of Excellence in Fertility Diagnostics and Reproductive Genetics, digital enablement, and securing strategic partnerships.

Q1FY22 Trading Update: The company entered FY22, with strong volume and revenue growth, owing to a positive mix of new patients receiving treatment.

• Growth in Australian Fresh Cycles: The company witnessed continuous cycle growth in its Australian clinics during the quarter, depicting a rise of ~3.5% year over year and was well ahead of the addressable market growth of 0.6%.
• International Cycle Growth: In 1QFY22, international cycle growth was flat on pcp, with Ireland, the UK and Singapore seeing volume growth of more than 8%, which was offset by reduced patient volumes in Denmark.
• Rise in ARS Revenue & Total Group Revenue: During the quarter, both ARS (Assisted Reproductive Services) and group revenue went up by 1.5%, each, respectively, on pcp basis. Revenues were positively impacted due to growth in Virtus cycle activity in Australia every month.
• Robust Performance from Diagnostic Revenue: In 1QFY22, the company’s Diagnostic sales boosted 10.4% on pcp, owing to an increase in genetic testing. Moreover, the outlook for the second quarter looks optimistic with the launch of Medicare refund and VRT’s commitment to providing genetic testing services to other industry players.
• Day Hospitals: Revenues from day hospital remained flat on pcp. The company witnessed growth in IVF procedures, partially offset by a reduction in non-IVF procedures due to government orders in Q1. For the coming quarter, activities are anticipated to return due to State-specific Health Orders' ease.

Roadmap and key Initiatives (Analysis by Kalkine Group)

Digging into FY21 Results:

• Robust Revenue Growth: In FY21, the company’s revenues increased ~25.4% year over year and came in at $324.6 million. The company has demonstrated strength in changing market conditions and outpaced overall market growth in Australia and International operations with ARS recovery and progressive market growth.
• Rise in Adjusted EBITDA & NPAT: EBITDA on an adjusted basis in FY21 came in at $84.1 million, up ~44.2% on pcp. The company’s adjusted net profit after tax (NPAT) came in at $37 million, up from $15.7 million reported in the year-ago period.
• International & Australian Segment Highlights: VRT’s international operations performed well during the period, with overall EBITDA in the International segment increasing 68.1% on pcp. This reflected robust progress in operating efficiency and capacity in doctor teams, donor programs, and marketing. Due to effective planning and government support, Australian operations went up ~24.4% on pcp in FY21.
• Dividend Declaration: The company declared a final dividend of 12 cents per share (fully franked), with a payment date of 29 October 2021. This brings the total dividends for the year to 24.0 cents per share.
• Capital Management Approach: During the year, VRT extended its existing three-year bank facilities, amounting to A$92 million (due to mature in October 2023). Notably, as of 30 June 2021, the company has $112 million debt funding capacity.
• Net Debt Reduction: As of 30 June 2021, the company’s net debt reduced by $19 million from $126 million at the end of FY20 to $107.1 million.

 Key Metrics: In FY21, the company's EBITDA margin stood at 25.1%, as compared to 21.5% in FY20. Cash cycle days in FY21 stood at -28 days, compared to the industry median of +18.2 days.

Profitability and Liquidity Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 53.06% of the total shareholdings, while the top 4 constitute the maximum holding. Paradice Investment Management Pty. Ltd. and Yarra Funds Management Limited are holding a maximum stake in the company at 8.32% and 8.01%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis:  The company is exposed to general global economic and market conditions risks. Notably, rising COVID-19 cases in UK & Europe has led to stricter restrictions in UK and Ireland. The rising market share of competitors could also impact the company’s operational and financial performance as it operates in a very competitive environment. Any adverse movement in foreign exchange prices and complex regulatory environment may affect the company's financial performance.

Outlook: VRT is taking necessary measures to strengthen its footing in the ARS space, given an enhanced focus on providing services across the ARS value chain, low cost, and full-service fertility treatments. For FY22 and FY23, the company would focus on numerous growth investments, including developing the Precision Fertility™ Digital Platform and building Reproductive Genetics capability. VRT anticipates incremental EBITDA from these investments in the ambit of $5-10 million p.a. from FY23. The company expects demand for ARS to continue into FY22 and is well-positioned to diversify revenue via growth in its Day Hospitals and its Fertility Diagnostic and Reproductive Genetics services.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative) 

Source: Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: The stock of the company has given a negative return of ~18.59% in the past six months. Currently, the stock has a 52-week’s high and low level of $7.47 and $4.94, respectively. The company has been valued using the P/E multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight discount as compared to its peers, considering forex headwinds, disruption in the supply chain, stringent regulation, COVID-19 led uncertainties, etc. For the purpose of valuation, peers like Monash IVF Group Ltd (ASX: MVF), Sigma Healthcare Ltd (ASX: SIG), Integral Diagnostics Ltd (ASX: IDX), and others have been considered. Considering the decent performance in the international and Australian segment, geographical diversification, rise in top-and-bottom line in 1HFY21, reduction in net debt, decent long-term outlook, indicative upside in the valuation, current trading level, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $5.11, as on 8 December 2021, ~10:30 AM (GMT+10), Sydney, Eastern Australia.

VRT Daily Technical Chart, Data Source: REFINITIV 

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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