Company Overview: Quantum Health Group Limited (ASX: QTM) is engaged in the distribution of medical products and caters to the radiology, oncology, aesthetics, and environmental health segments. It has a presence throughout Asia and has operations in Korea, Australia, New Zealand, Thailand, Philippines, China, and Vietnam. In FY21, revenues from Australia contributed ~41% of the sales mix, followed by Korea (~31%), Thailand (~25%), Philippines (~2%) and China (~1%).

QTM Details

Decent Bottom-Line Performance Aided by Shift to High Margin Services Revenue Mix: The company represents some of the prominent names in the healthcare equipment manufacturing space as the preferred distribution partner and includes the likes of Carestream, Samsung, Philips, IBA, Accuray and Classys.

Business Opportunity in Asia:

• QTM has a strong presence in Asia and the leverage of its medical equipment distribution platform enhances the scope for margin efficiencies and thus complements organic growth in the region.

FY21 Performance Overview:

The company delivered a resilient performance during FY21 with growth in bottom-line owing to prudent cost measures during the year.

• The revenue stood at $55.67 million in FY21, compared to $59.39 million in FY20, impacted by the onslaught of the COVID-19 pandemic.
• EBITDA of the company increased to $10.74 million in FY21, compared to $9.33 million in the previous year. The growth has been aided by the recent acquisition of Carestream Health, which provides the comfort of higher ongoing service revenues and high gross profit margin.
• There has been a reduction in the marketing and travel expenses during the year owing to the COVID-19 pandemic, and the trend is expected to sustain in the long term due to the advancement of communication technology and business practices.
• Cash receipts grew by 4.7% to $65.1 million in FY21, compared to $62.2 million in the prior year.
• QTM ended the year with an uplift in cash position to $11.94 million as of 30 June 2021, compared to $8.76 million as of 30 June 2020.

Trend in Margin Performance (Source: Analysis by Kalkine Group)

Shift to High Margin Service Model:

• Quantum has been realigning its margin model to include the growing service business, which provides the advantage of recurring revenue streams at higher margins.
• The transition has resulted in a marginal decline in revenue levels but has contributed to improved operating profits.
• The acquisition of the service businesses of Carestream in Australia, New Zealand and Philippines in 2020 increases the service install base to over 3,500 systems.

Top 10 Shareholders: The top 10 shareholders together form around 77.26% of the total shareholding, while the top 4 constitute the maximum holding. Walstab (John Andrew) and Townsend (Drew A) are holding a maximum stake in the company at 45.62% and 11.74%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics:  The company reported an improvement in the returns performance and reported an ROE of 17.5% in FY21, compared to 16.5% in FY20. There has also been an improvement in the leverage profile of the company with the debt-to-equity ratio at 0.19x during FY21 end, down from the levels of 0.29x in FY20 end.

Growth Profile and Leverage Profile (Source: Analysis by Kalkine Group)

Key Risks: The company is exposed to the following risk factors:

• Foreign Exchange Risk: It has operations in different geographies and thus is prone to the impact of foreign currency fluctuation risk.
• Credit Risk: The Group is also exposed to credit risk in the scenario of any counter party defaulting on its contractual obligations, which might impact the company’s performance.
• Margin Risk: QTM is a margin-led business and any impact on its ability to retain favourable margin levels might have an impact on the bottom-line of the company.

Outlook: The company has delivered decent growth in profit over the past few years which further emboldens the management for future investments and growth initiatives. It has cordial relations with global suppliers and customers in Asia, which provides an opportunity to augment its market share in the region. The Group seems to be optimistic about its performance going forward, despite the COVID-19 headwinds and will further look to create organic and value-accretive growth opportunities.

Stock Recommendation:  The company has appointed Stephanie Wen to its Board of Directors as Non-Executive Director, effective from 27 September 2021. As per ASX, the stock of QTM is trading close to its average 52-weeks’ levels of $0.043-$0.105. The stock of QTM gave a positive return of ~13.63% in the past one week. On a TTM basis, the stock of QTM is trading at an EV/Sales multiple of 1.5x, lower than the industry median (Healthcare Equipment & Supplies) of 10.3x. Considering the valuation on TTM basis, growth in bottom-line performance, increase in margins, shift to recurring revenue-based high margin model, decent balance sheet and the key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.075, down by 2.598% as on 01 October 2021.

Technical Insights:

On the Monthly Chart, QTM prices moved up last month with heavy volumes after the price broke the resistance level of $0.070. Prices are now heading towards its upward sloping trend line resistance at $0.090. RSI (14-period) is hovering at ~64 level, indicating the prices are trading in bullish momentum. Immediate support levels are $0.071 and $0.057, while immediate resistance levels are $0.090 and $0.10.

QTM Daily Technical Chart, Data Source: REFINITIV

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

Note 2: Investment decisions 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 analysis has been achieved and subject to the factors discussed above alongside support levels provided.

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.

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