Company Overview: Virtus Health Limited is an assisted reproductive services provider engaged in the provision of healthcare services, including fertility services, medical day procedure services and medical diagnostic services. The Company has six operating segments: New South Wales, Queensland, Victoria, Tasmania, Australian Diagnostics and International. It has consolidated its operations into two segments, being an Australian aggregated healthcare services segment (Healthcare Services Australia) and an International healthcare services segment (Healthcare Services International). Its fertility clinics include IVFAustralia, Melbourne IVF, Queensland Fertility Group, Rotunda IVF and Virtus Fertility Centre. Its day hospitals include North Shore Specialist Day Hospital, Spring Hill Specialist Day Hospital, Mackay Specialist Day Hospital, City East Specialist Day Hospital and City West Specialist Day Hospital. It offers general pathology services, as well as specialist fertility and genetic testing. 
 

VRT Details
 
International Expansion & Contribution from Trianglen are Key Catalysts: Virtus Health Limited (ASX: VRT) is involved in providing fertility services, medical diagnostic services, and medical day procedure services. The company is one of the leaders in offering Assisted Reproductive Services (ARS) in Australia, Ireland, UK, Denmark & Singapore. The company has more than 127 fertility specialists all over the world, aided by greater than 1300 professional staff. For the year ended 30 June 2019, the company reported revenue of $280 million, up around 6.1% year over year. EBITDA for the year stood at $63.5 million, a decline of 2.3% year over year. Revenue increased on the back of robust TFC performance, progress in QFG full service, a strong contribution from Trianglen (Denmark) and a full year contribution from Complete Fertility in the UK. EBIT for the year came in at $49.9 million, down from $52.5 million reported in FY18. In FY19, net profit after tax (NPAT) came in at $28.4 million, a decline of 7.6% year over year. Earnings per share for the period came in at 35.37 cents, down from 38.26 cents in FY18. The company declared a final dividend of 12 cents per share (fully franked) in FY19.
 
For FY20, the company remains focused on relocating the main pathology lab to a larger facility, aiding improved scope of testing and capacity for future growth prospects. The company also remains on track to scientifically evaluate advanced technologies for non-invasive PGT. Further, the company is taking necessary measures to recruit specialists to assist in diagnostics growth. In addition, the company is focused on developing its business to increase internal and external specialist referrals.
 
The company witnessed a compound annual growth rate of 4.6% in revenue in the time span of FY15-FY19. The company has been investing in new technologies and scientific research to reduce time to pregnancy and deliver better patient outcomes. Growth strengthened as the company is expanding its international revenue, on the heels of organic activities and acquisitions synergies in international markets. Further, the company’s diversified and vertically integrated model will aid organic growth and value realisation. 
 
 
Growth in Revenue (Source: Company Reports)
 
FY19 Performance: During the period, revenue came in at $280.1 million, increasing 6.1% year over year.EBITDA for the year stood at $63.5 million, declining 2.3% year over year. Notably, revenues from international operations grew to 21% of group revenue. EBITDA decline was due to lower genetic testing and an increase in compliance costs for diagnostics. Higher relocation costs and up-gradation costs at Alexandria and Hobart Specialist Day Hospitals also impacted EBITDA in FY19. Nonetheless, the first-time contribution from Trianglen (Denmark) along with profit on IP sale were key positives. In FY19, net profit after tax (NPAT) stood at $28.4 million, down from $30.8 million reported in FY18.
 

FY19 Results (Source: Company Reports)
 
Results for Australian Operations Fertility: The company’s number of IVF cycles in the Australian segment grew 1.5% year over year to 15,460 cycles. TFC cycles as a percentage of total Virtus IVF cycles came in at 17.9% in FY19, up from 14.5% in FY18. The average number of cycles per fertility specialist in FY19 grew 3.5% on a year over year basis. Australian segment EBITDA margin in FY19 came in at 28% as compared to 30.7% in FY18.
 
Segment Performance: During the year, revenue from the Australian segment remained in-line with pcp and came in at $218 million, despite overall cycle mix change. On the international front, the company saw revenue from the Irish operations increase by 0.7% on pcp, to €21.9m, primarily due to lower cycle volumes, which was fully offset by an increase in frozen cycles. In the UK, the company reported revenue amounting to £3.1 million with a lower than expected positive EBITDA. In the UK, the company completed the refurbishment of the facility to accelerate opportunities for expansion. However, the clinic in the UK witnessed lower-than-expected revenues due to disruption in operations and lower donor cycle activity. Volumes and EBITDA from the Singapore operations continued to grow during the period. Danish clinics posted a mix set of results with revenue at DKK13.4 million in FY19, down from DKK20.9 million in FY18.
 

Australian Segment Details (Source: Company Reports)
 

International Segment Highlights (Source: Company Reports)
 
Balance Sheet Position: At the end of the year, the company reported a cash balance of $18.8 million. The company’s total borrowings at the end of the year came in at $173.7 million, down from $180.8 million as at 30 June 2018. Notably, the company declared 12 cps fully franked dividend in FY19, payable on 25 October 2019.
 
Cash Flow Position: Operating cash inflow in FY19 came in at $38.3 million as compared to $54.9 million in FY18. Free cash flow amounted to $23.7 million in FY19, as compared to $39.4 million in FY18. Free cash flow after dividends stood at $4.4 million, as compared to $18.5 million in the previous year.
 

Cash Flow Details (Source: Company Reports)

In FY19, the company had around 20,300 fresh IVF cycles worldwide. Virtus Health Limited had a total of 37,864 fertility treatments in FY19 along with 32,827 days hospital procedures and 200,000 diagnostics referrals. The company remains on track to grow its operations internationally. In doing so, it is taking necessary measures to diversify and vertically integrate its business model. With the above scenario in place, the company is confident about retaining its existing customer base and expects to maintain dominant growth momentum in FY20.
 
Recent Update:

Virtus Acquired Remaining 15% Stake in Sims IVF Group: The company recently announced that its fully owned subsidiary, Virtus Health Ireland Limited, has bought the remaining 15% interest in Sims IVF Group for €4.05 million. The acquisition was financed through Virtus’ existing cash resources and brings the company’s possession of the Sims IVF Group to 100%.
 
Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 48.14% of the total shareholding. Allan Gray Australia Pty Ltd is the entity holding maximum shares in the company at 10.77%. Challenger Managed Investments Ltd. is the second-largest shareholder, with a holding of 5.89%.
 

Top Ten Shareholders (Source: Thomson Reuters)

Key Metrics:  In FY19, the company had a gross margin and EBITDA margin of 72.8% and 21.5%, which is higher than the industry median of 37.2% and 15.3%, respectively, representing decent fundamentals. The company’s debt-to-equity multiple in FY19 stood at of 0.62x, lower than the debt-to-equity multiple of 0.67x in FY18, demonstrating a better financial position. Net margin of the company was reported at 10.4%, higher than the industry median of 3.6%.


Key Metrics (Source: Thomson Reuters) 

Outlook: For FY20, the company remains dedicated to relocating the main pathology lab to a larger facility, aiding improved scope of testing and capacity for future growth. The company also remains on track to scientifically evaluate advanced technologies for non-invasive PGT. Further, the company is taking necessary measures to recruit specialists to assist in diagnostics growth. In Australia, the company aims to grow its low-price volume services, diagnostic revenue, and non-IVF day hospital revenue during FY20. In addition, the company is also focused on delivering organic growth in its existing footprints outside Australia. It is targeting for potential acquisition opportunities across key international markets to expand international revenue and performance. The company is expanding its R&D activities into new spheres in the health care industry wherein AI can additionally improve and enhance patient’s outcomes on a global basis.
 

Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology: Price to Cash Flow Multiple Approach

Price to Cash Flow Based Valuation (Source: Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
 
Stock Recommendation: The stock of the company is currently trading close to the average of its 52-week trading range of $3.810 - $5.280. In FY19, the company delivered a decent result, driven by robust TFC performance, progress in QFG full service, a strong contribution from Trianglen (Denmark) and higher contribution from Complete Fertility in the UK. The company made substantial investments in infrastructure, people, and technology. The company is also aiming for expansion in Australia through advanced technologies, recruitment of specialists and other business development proposals. In FY19, the company had an EBITDA margin of 21.5%, which is higher than the industry median of 15.3%. Net margin for the year was reported at 10.4% as compared to the industry median of 3.6%. From the analysis standpoint, the company has recorded revenue CAGR of 4.6% over the last four years. Considering the above factors, we have valued the stock using a relative valuation method, i.e., Price to Cash Flow multiple, and for the purpose, we have taken the peer group Monash IVF Group Ltd (ASX: MVF), Integral Diagnostics Ltd (ASX: IDX), Estia Health Ltd (ASX: EHE), etc. As a result, we have arrived at a target price depicting an upside of lower double-digit (in % terms). Hence, we recommend a “Buy” rating on the stock at the current market price of $4.350, down 0.685% on 22^nd January 2020.

 
VRT Daily Technical Chart (Source: Thomson Reuters)

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