Company Overview: Volpara Health Technologies Limited (ASX: VHT) is a software application-based company, which provides breast imaging analytics services and products. The company offers superior-quality and personalised breast cancer screening software applications to its patients. The artificial intelligence imaging technologies of VHT aid in the premature detection of breast cancer. Formed in 2009, the company focuses at lowering the death rate and cost of breast cancer via Volpara software.  Volpara Enterprise software is backed by the company’s suite of market-leading clinical products, which consists of VolparaDensity, VolparaDose, VolparaPressure, VolparaPositioning and VolparaServer.
 

VHT Details

Higher Investments & Acquisition Synergies Benefit VHT: Volpara Health Technologies Limited (ASX: VHT) is a New Zealand based health sector company, which is engaged in providing health solutions relating to breast cancer. The company builds digital health solutions to facilitate personalised breast cancer screening software applications. The AI imaging knowhows accessible with VHT, help to improve clinical decision-making process and identifies early detection of breast cancer. The company is involved in research, development, and manufacturing of breast imaging analytics and analysis products.
 
In FY20, the company had more than 10 million US women, and around 300k Australian women, who availed the benefits of a safer and more relaxed breast cancer screening facility. The company’s SaaS-based platform along with higher investment aided the company to provide such services. Annual Recurring Revenue (ARR) for the period came in at NZ$18 million, up 172% from the prior corresponding year, thanks to organic & inorganic growth. Notably, over ~27% of the US women get screened each year. The company’s non-GAAP revenues went up a whopping 226% year over year and came in at NZ$16.3 million, in FY20.
 
The company had entered into an agreement to buy US-based MRS Systems for a consideration of ~NZ$21 million. With MRS acquisition, the company will be able to develop its product portfolio and enhance its artificial intelligence and machine learning imaging algorithms. This, in turn, will aid VHT to provide high-quality breast care treatment via new technology development. The company made significant investments in R&D and engineering of almost NZ$11 million in FY20.
 
Continual investments into business capability and capacity with addition of three new executives to Volpara executive team in Operations, People and Customer Success help to aid the company’s growth and innovation, in the long run. Notably, VHT continues to lessen the mortality rate and cost of breast cancer by delivering clinically proven software that bolsters high-quality and personalized breast cancer screening. The move is likely to help drive the next wave of growth and improvement for the company. Also, the company remains on track to grow the engineering team to accelerate the core functionality of VolparaDensity and VolparaEnterprise.
 
The company witnessed a CAGR of 90.1% in revenue in the time period of FY17-FY20. VHT has been investing in new technology and service enhancement, with enhanced focus on clinical software, quality management and personalized care systems. Going forward, the company is seeking to continuously enhance its business via organic growth through higher investments and high-quality care facility. A debt-free balance sheet will help the company to attain its long-term objectives of expanding the business through acquisitions and delivering continued growth in shareholders’ returns. 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. Notably, cash on hand increased from NZ$12.9 million in FY17 to NZ$31.4 million in FY20.
 

 
Key Trends (Source: Company Reports)
 
FY20 Performance: Revenues for the period came in at ~NZ$12.6 million, up 153% year over year. The increase was primarily aided by higher subscription revenue, which soared 106% year over year. During the period, percentage of women in the US, having a Group product applied to their images and data stood over ~27%. Notably, team expansion and scaled up operations, led to an operating loss of NZ$22.96 million in FY20. Loss after tax was up 73% year over year. The company’s gross margin stood at 86% in FY20, up from ~83% year over year. Operating costs for the period increased to NZ$36 million from NZ$17.1 million in FY19, due to higher investment in the business for growing the sales, marketing and customer success teams’ capability along with costs incurred after the acquisition of MRS buyout. Moreover, adding resources into engineering for R&D and strengthening the executive team with new roles in operations, people and customer success also led to an increase in operating expenditure.
 
 
Key Highlights (Source: Company Reports)
 
Geographical Highlight: During the period, total revenues with respect to North America, EMEA, and APAC stood at NZ$11.9 million, NZ$134k and NZ$588K, respectively. In FY19, the figures stood at NZ$4.2 million, NZ$243K and NZ$535K, respectively. Majority of the company’s revenue is derived from the sale of clinical functions and patient tracking software.
 

Geographical Metrics (Source: Company Reports)
 
Balance Sheet & Cash Flow Details: As on 31 March 2020, the company’s cash balance came in at NZ$31.4 million. The company successfully completed the share purchase program on 18 May 2020, subsequent to which VHT’s cash balance stood at NZ$69 million. This provides Volpara with substantial flexibility to gauge potential future strategic acquisitions and expand its product offering. Operating cash outflow stood at NZ$15.9 million as compared to a cash outflow of NZ$10.6 million in FY19. The Group continues to hold no debt.
 

Cash Flow Details (Source: Company Reports)
 
Recent Updates:

1. Recently, the company announced that its subsidiary company, Volpara Solutions, has entered into a partnership deal with Ambry Genetics®, one of the top genetic testing companies across the globe.
 
2. In another update, 2020, the company collaborated with DetectED-X™, an online radiology training and research tool, to offer free access to learning modules, in order to detect COVID‑19 virus.

 
Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 37.38% of the total shareholding.
 

Top Ten Shareholders (Source: Refinitiv, Thomson Reuters)
 
Key Metrics: In FY20, the company had a gross margin of 86%, which is higher than FY19 and FY18 figure of 82.6% and 77%, respectively, representing decent fundamentals.
 

Key Metrics (Source: Refinitiv, Thomson Reuters)
 
Outlook: Going forward, the company expects to increase its US sales team along with its APAC & European team with a full suite of products. Further, the company’s product suite has expanded over the last few years, allowing for increased ARPU from new and existing customers. The momentum is expected to continue, going forward. The company is also working towards restraining costs and optimizing work, with the integration of MRS Systems. The company’s efforts for R&D and product improvement will continue to innovate its product suite with the expanded engineering and science teams. VHT remains on track to focus on long-term SaaS contracts, which stand to benefit even with COVID-19 outbreak. The company’s cash collection continues to be strong & shows no signs of any significant churn risks.
 
The company opines that it is well equipped for M&A opportunities that will emerge in FY2021. Further, the company’s strategy to expand its product portfolio and improve its AI imaging algorithms through the latest technology advancement can additionally improve and enhance patient outcomes on a global basis. In light of the ambiguity on wider business activity due to COVID-19 pandemic, Volpara has undertaken various proposals, which are expected to yield cost savings in the range of 10-15% on annualised operating costs.
 

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)
 
Valuation Methodology:  EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, 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 A$0.79 - A$2.170. The stock has a market cap of ~A$345.17 million. The company gave a negative return of ~21.41% in the last six months but ran up ~9.41% in the last one-month period. In FY20, the company delivered a decent result, driven by increased investment in new technology as well as improvements in quality and personalised care systems. From the analysis standpoint, the company has recorded revenue CAGR of 90.1% over the last three years (FY17 – FY20). Considering the above factors, we have valued the stock using EV/Sales multiple based illustrative relative valuation approach (illustrative), and for that purpose, we have considered Pro Medicus Ltd (ASX: PME), Nanosonics Ltd (ASX: NAN) and Telix Pharmaceuticals Ltd (ASX: TLX), as peer group. As a result, we have arrived at a target price of low double-digit growth (in percentage terms). Hence, we recommend a “Buy” rating on the stock at the current market price of A$1.40, up ~0.358% on 3 June 2020. 
 
 
VHT Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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