Company Overview: Virtus Health Limited (ASX: VRT) provides assisted reproductive services (ARS), fertility care services and related specialised diagnostic and day hospital services in Australia, Ireland, and Denmark with a presence in Singapore and UK. VRT has ~123 fertility specialists with more than 1300 professional staff all over the world.

VRT Details

VRT Rides on Decent Operational & Financial Fundamentals: VRT remains well focused on maximising return by investing higher in scientific research and new technologies, including Artificial Intelligence, to deliver improved patient experience. In addition, the company 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.

Key Takeaways from 1HFY21 Results

• Robust Revenue Growth: In 1HFY21, the company’s revenues increased ~19.4% year over year and came in at $169.61 million. The company has demonstrated strength in changing market conditions and outpaced overall market growth in Australia. Revenues were positively impacted due to growth in Virtus cycle activity in Australia every month.
• Rise in EBITDA: Reported EBITDA for the half-year came in at $58.97 million, up ~49.1% on pcp. EBIT for the period increased ~75% year over year and came in at $47.03 million reported in 1HFY21.
• Strong Bottom-Line Growth: The company’s adjusted net profit after tax (NPAT) came in at $23.1 million, up from $14.5 million reported in the year-ago period. Diluted earnings per share for the period came in at 36.98 cents, up 100.1% on pcp.

• International Expansion: VRT’s international operations performed well during the period and contributed 19% of total Group revenues in 1HFY21. Due to effective planning and government support, there has been continued growth in Australian operations, which went up 21.3% on pcp in 1HFY21.

• Growth in Diagnostic Revenues: During the period, the company’s Diagnostics revenue increased 9.7% on pcp, indicating improved Preconception Genetic Testing (PGT) volumes from IVF cycles.
• Dividend Declaration: The company declared an interim dividend of 12 cents per share, with a payment date of 15 April 2021.

• Robust Capital Management Strategy: In December 2020, VRT extended its existing three-year bank facilities, amounting to A$92 million (due to mature in October 2023). Notably, as of 31 December 2020, the company has more than $115 million debt funding capacity. In 1HFY21, the company repaid debt amounting to $10 million, with a leverage ratio of 1.7x at 31 December 2020, compared to 2.1x at the end of FY20. 

The below picture depicts VRT’ continuous growth trajectory since 1HFY18 

Top-Line Performance; Analysis by Kalkine Group

Balance Sheet & Liquidity Position: 

• Reduction in Net Debt: As of 31 December 2020, the company reported a cash balance of $37.11 million. The company’s borrowings were reduced at the end of the period and came in at $153.9 million, due to voluntary debt repayments. At the end of the period, net debt stood at $117.9 million, down from $126.9 million as of 30 June 2020.

• Increase in Operating Cash inflows: Operating cash inflow in 1HFY21 came in at $32.1 million, compared to $23.64 million in 1HFY20. Free cash inflow after dividends stood at $9.4 million in 1HFY21.

Key Metrics: In 1HFY21, the company's gross margin stood at 72.7%, higher than the industry median figure of 44%. EBITDA margin for 1HFY21 stood at 28.4%, as compared to 26.1% in 1HFY20. Debt-to-equity ratio in 1HFY21 came in at 0.86x, lower than the year-ago figure of 0.95x. Cash cycle days in 1HFY21 stood at -120.8 days, compared to industry median of -7.3 days.

Profitability and Liquidity Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 49.78% 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 8.86% and 8.56%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group  

Risk Analysis: 

• COVID-19 Led Uncertainties: The company is exposed to risks associated with general global economic and market conditions. Notably, rising COVID-19 cases in UK & Europe has led to stricter restrictions in UK and Ireland. This, in turn, could impact activity in Q3FY21.
• Stiff Competition:VRT operates in a highly competitive environment, which is subject to business consolidations, new strategic alliances, market pressures, and regulatory and legislative pressures.  
• Forex Headwinds:Any adverse movement in foreign exchange price may impact the financial performance of the company.

Outlook: The company has exhibited strength and has recovered strongly in 1HFY21. The growth impetus is expected to continue in the days ahead. The company remains optimistic regarding its clinics. VRT continues to collaborate with Harrison.ai to integrate artificial decision support into the new digital platform. The company is also focusing on increasing its International revenue in existing locations, while pursuing its cost-cutting initiatives. It is taking the necessary steps to bolster its position in Australia, Singapore, Danish, Irish, and the UK markets. Additionally, VRT’s diversified, and vertically integrated model is likely to enable organic growth and value realisation in the long-run. The company is set to report its FY21 results on 26 August 2021.

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 positive return of ~16.77% in the past six months. Currently, the stock has a 52-week’s high and low level of $7.47 and $2.96, 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 peer average, considering its supply chain disruption risk, increased costs and expenditure, foreign currency risk, strict regulatory approval, leveraged balance sheet, 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 other, have been considered. Considering increase in top-and- bottom line in 1HFY21, reduction in net debt, decent long-term outlook, international expansion, valuation, and key risks related with the business (as stated above), we recommend a “Speculative Buy” rating on the stock at the current market price of $7.24, as on 18 August 2021, 1:35 PM (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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