Company Overview: Volpara Health Technologies Limited (ASX: VHT) is a software application-based company, offering an integrated platform for the delivery of customised breast care via breast imaging analytics. The company was incorporated in 2009 and provides superior-quality and personalised breast cancer screening software applications to its patients. VHT operates in Europe, North America, Asia-Pacific (APAC), the Middle East and Africa (EMEA), and Corporate.

VHT Details

Strategic Alliances & Contract Wins Aids VHT: VHT has made significant investments in product development and technology. The company remains dedicated to developing the Breast Health Platform to build an enhanced patient experience, clinical software, quality management, and personalised care systems. These initiatives aid the company to capitalise on the risk and genetics markets.

Digging Into Q2FY22 & FY21 Key Aspects:

• Deal Wins: VHT inked its biggest contract-to-date with Akumin Corp., in the US, which came into effect immediately. The company plans to install its Patient Hub software across the customer’s imaging centres in 11 states in the coming 3 to 6 months. The US$2.15 million contract is for 5 years, representing US$430K in ARR and with an option to the customer to cease the contract post 3.5 years.
• Rise in Receipts from Customers: The company witnessed robust cash receipts from customers of NZ$7.1 million in the running 3Q, depicting a rise of 11% quarter over quarter and 52% year over year. On a constant currency basis, cash receipts went up 68% on pcp. Markedly, subscription-based receipts grew ~63% year on year, and around 74% on a constant currency basis.
• ARR & ARPU Growth: VHT recorded an ARR (Annual Recurring Revenue) of ~NZ$29 million (~US$20.4 million) from more than 700 customers, indicating a rise of ~10% since the end of Q4FY21. The average revenue per unit (ARPU) stood at US$2.04 during the quarter, compared to US$1.42 in 1QFY22, primarily driven by significant volume deals.
• Strategic Deal & Software Product Usage: The company signed partnership contracts with Natera for genetics collaboration and with Riverain, RevealDX, & MeVis, for lung cancer screening during Q2FY22. The company has also contracted at least one software product to be implemented for breast cancer screening of ~13.4 million US women. Notably, Volpara® Lung^TM software presently covers ~8% of the US market.
• Improvement in Top and Bottom Line: In FY21, the company reported total revenues of NZ19.7 million, depicting an increase of 57% year over year, owing to higher subscription revenues. Net loss after tax improved ~14% year over year, primarily due to a higher revenues base and the control of operating expenses.
• Cash & Liquidity Position: In 2QFY22, the company reported net operating and investing cash outflow of NZ$3.8 million. Excluding investment in intellectual property, net operating cash outflows stood NZ$3.0 million. The company exited 2QFY22, with a cash on hand balance of NZ$25 million, with nil debt. The company exited FY21 with a cash balance of NZ$32.2 million. Total debt at the end of FY21 stood at NZ$5.37 million.

The below picture depicts a continuous growth trajectory in the company’s cash position in the past years.

Cash Highlight; Analysis by Kalkine Group

Key Metrics: In FY21, the company’s gross margin stood at 91.4%, higher than the year-ago figure of 85.9%. Moreover, EBITDA, operating and net margins showed an improvement on a year over year basis. Cash cycle days in FY21 stood at -36.4 as compared to the FY20 figure of 1.7 days.

Profitability Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 34.26% of the total shareholdings, while the top 4 constitute the maximum holding. Harbour Asset Management Limited and Allen (Roger) are holding a maximum stake in the company at 10.03% and 7.35%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group  

Risk Analysis: The company is exposed to stiff competition risk in lungs and breast contracts space with minimal product differentiation. Further, forex headwinds, delays caused by regulatory approvals, uncertainties, increasing expenditure, due to higher investments in its Platform and IP may erode bottom-line growth.

Guidance: The company completed two significant acquisitions of MRS Systems, Inc., and CRA Health, LLC. As the business holds the ability to carry out additional acquisitions, it is seeking to discover the next set of quality businesses that can perform as drivers for future growth. VHT estimates more than $400 million ARR in the US market given the commercial opportunity for lung screening. For FY22, the company is expecting to increase revenues by over 25% year over year to ~NZ$25 million by selling cancer screening software platforms. During FY21, the company raised A$37 million from a successful placement and subsequent Share Purchase Plan. This provides the company with substantial flexibility to gauge potential strategic acquisitions and expand its product offering.

Valuation Methodology: EV/Sales 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 been corrected by ~9.26% in the past six months. Currently, the stock has a 52-week’s high and low level of A$1.715 and A$1.05, respectively. The stock has been valued using an EV/Sales 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 compared to its peers’ average EV/Sales multiples, considering integration risk, volatility in the healthcare industry, the lower current ratio in FY21, negative ROE, etc. For the purpose of valuation, peers such as Nanosonics Ltd (ASX: NAN), Medical Developments International Ltd (ASX: MVP), and others have been considered. Considering current trading levels, indicative upside in valuation, higher ARR, capital raising initiatives, optimistic outlook, healthy balance sheet, acquisition synergies, strategic deal wins synergies, and a strong foothold in lung cancer screening space, we recommend a “Buy” rating on the stock at the current market price of A$1.2, down by ~4% as on November 3, 2021.

VHT Daily Technical Chart, Data Source: REFINITIV

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.

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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