Company Overview: A software application-based company, Volpara Health Technologies Limited (ASX: VHT), is engaged in offering an integrated platform for the delivery of customised breast care through breast imaging analytics. The company was incorporated in 2009 and was listed on ASX in April 2016. VHT has its operations in Europe, North America, Asia-Pacific (APAC), the Middle East and Africa (EMEA), and Corporate.

VHT Details

Improving Digital Experience & Acquisition Synergies Aids VHT: VHT’s technology and services have been adopted in 39 countries, backed by several patents, trademarks, and regulatory clearances. The company has raised ~A$132 million since April 2016, and has made two significant acquisitions, namely MRS Systems, Inc. and CRA Health, LLC. With this, the company is witnessing enormous momentum for its Breast Health platform and remains focused to build an improved patient experience, clinical software, quality management, and personalised care systems.

Putting Spotlight on VHT’s 1HFY22 Key Results:

• Impressive Growth in Revenues and Bottom Line: In 1HFY22, the company reported total revenues of NZ$12.3 billion, depicting an increase of 30% year over year, and 38% on a constant currency basis, owing to higher subscription revenues. Net loss after tax improved ~4% year over year.
• Upward Trend in Gross Profit: In 1HFY22, gross profit came in at NZ$11.26 billion, up by 30%, embarking upon a gross profit margin of 91.4%. The gross margin has remained stable with H1FY21.
• Robust Growth in ARR & ARPU: VHT recorded an ARR (Annual Recurring Revenue) of ~NZ$29 million (~US$20.4 million) in 1HFY22, up from ~NZ$19.9 million (~US$12.8 million), owing to continued growth in SaaS metrics. The average revenue per unit (ARPU) stood at US$1.46 in 1HFY22, compared to US$1.16 in 1HFY21, primarily driven by significant volume deals.
• Strong Foothold in the US market: The company’s share in the US market increased to 34% at the end of 1HFY22, compared to 32% at the end of FY21, depicting new and existing customer growth. Notably, more than 13.4 million US women are now using at least one VHT product, thus helping women get better, more secure, and accurate breast cancer screenings.
• Strategic Collaborations: In 1HFY22, the company inked collaboration deals with Natera and Invitae, both leaders in the genetic testing market. The recent move has bolstered VHT’s customer base. In addition, this adds to its existing agreements with Ambry and Myriad, which might contribute to its top-line growth in the near term.
• Cash & Liquidity Position: The cash balance as of 30 September 2021 stood at NZ$25.0 million, down from NZ$32.2 million as reported at the end of FY21. Net operating cash outflow stood at NZ$5.5 million, an improvement of 30% from NZ$7.8 million reported in 1HFY21.

1HFY22 Revenue Mix; Analysis by Kalkine Group

Business update: The company remains well-positioned at the end of Q3FY22 and have surpassed net new annual recurring revenue during the quarter on a year over year basis. The company has won the SaaS Award and has been acknowledged for improving breast cancer screening in the annual Microsoft New Zealand Partner Awards.

Key Metrics: In 1HFY22, the company’s gross margin stood at 91.4%, slightly higher than the 2HFY20 figure of 91.2%. Cash cycle days in 1HFY22 stood at 142.1 days as compared to the 1HFY21 figure of 156.5 days.

Profitability Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 34.25% 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 10.02% and 7.34%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis: The company is exposed to high competition risk in lungs and breast contracts space with minimal product differentiation. Further, currency movements, delayed regulatory approvals, COVID-19 uncertainties, and increasing expenditure due to higher investments, may erode bottom-line growth. It is worth mentioning that the company remains cautious regarding its declining cash balance, which might hinder it from pursuing its long-term objectives.

Expect What? 

For FY22, the company expects revenues to be ~NZ$25 to NZ$26 million by selling cancer screening software platforms. VHT is improving the Electronic Health Record (EHR) sales channel. The company is constantly building its data platform with over 49 million images in the cloud, holding one of the largest data sets of breast x-rays. In addition, VHT is choosing to support the healthcare industry by standing at major industry trade shows, including RSNA. These interactions, digital marketing focus, and new initiatives are expected to expand VHT’s existing and new customer base.

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 company's stock has been corrected by ~28.91% in the past three months. The stock is currently trading close to its 52-week low level of A$0.9. 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, declining cash balance, regulatory hindrances, etc. For the purpose of valuation, peers such as Nanosonics Ltd (ASX: NAN), PolyNovo Ltd (ASX: PNV), and others have been considered. Considering the above-mentioned factors, current trading levels, indicative upside in valuation, strategic collaborations, capital raising initiatives, improving bottom-line, optimistic long-term outlook, a decent foothold in lung cancer screening space, expected headwinds related to COVID-19 Omicron, and key risks associated with the business, we recommend a “Speculative Buy” rating on the stock at the closing market price of A$0.91, down by ~3.704% as on 19 January 2022.

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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