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 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.

Buyout Synergies and Contract Wins Aids VHT: Volpara Health Technologies Limited (ASX: VHT) is a New Zealand based health sector company, which is engaged in providing digital health solutions relating to breast cancer. The AI imaging knowhows accessible with VHT help to improve the clinical decision-making process and identifies early detection of breast cancer. The company is involved in research, development, and manufacturing of breast imaging analytics products.

In FY20, the company signed a contract to offer VolparaEnterprise and VolparaDensity to Queensland X-ray, which performs private breast cancer screening throughout the state. This deal expands VHT’s Australian coverage. Given that many of the company’s shareholders dwell in Queensland, this deal is especially attractive.Further, it is worth noting that the company’s earliest US VolparaEnterprise customers from 2017 have renewed and extended their contract, more than doubling its Average Revenue per User (ARPU). Volpara’s biggest contract till date, is set to produce more than US$1.6 million revenue over five years and substantiates the power of the platform approach.

The company had also entered into an agreement to buy US-based MRS Systems for a consideration of ~NZ$21 million. With MRS, 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.

In FY20, the company had more than 10 million US women, and ~300k Australian women, who availed the advantages of a safer and more relaxed breast cancer screening facility. The company’s SaaS-based platform along with higher investment aided such services. Annual Recurring Revenue (ARR) for the period stood at NZ$18 million, up 172% from the prior corresponding year. The company’s non-GAAP revenues went up by a substantial 226% year over year to NZ$16.3 million for FY20.

Going forward, the company seeks 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. Given its strong cash position, the company will also consider potential quality business opportunities as acquisition targets for future growth

The company witnessed a CAGR of 90.1% in revenue over the period FY17-FY20. VHT has been investing in new technology and service enhancement, with enhanced focus on clinical software, quality management and personalized care systems. Notably, cash on hand increased from NZ$12.9 million in FY17 to NZ$31.4 million in FY20.

Past Performance (Source: Company Reports)

FY20 Key Performance Highlights: IFRS 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. Notably, team expansion and scaled up operations, led to an operating loss of NZ$22.97 million in FY20. In the same time span, the company’s net loss after tax increased 73% year over year. The company’s gross margin stood at ~86% in FY20, up from ~83% in FY19. Operating costs for the period increased to NZ$36 million from NZ$17.1 million in FY19, due to higher sales and marketing, product R&D, and general and administrative expenses along with additional costs incurred post MRS buyout.

Key Financial Highlights (Source: Company Reports) 

Balance Sheet & Cash Flow Highlight: As on 31 March 2020, the company’s cash balance came in at NZ$31.4 million. After the successful completion of the share purchase program on 18 May 2020, VHT’s cash balance stood at NZ$69 million. This provides Volpara with substantial flexibility to gauge potential 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. 

A look at 1QFY21 Key Financials: During Q1 FY21, the company reported a growth of NZ$1.1 million in ARR to NZ$19.1 million driven by customer additions and upsells, customers initiating maintenance contracts for the first time, as well as movements in foreign exchange. VHT reported a growth of 112% in cash receipts from customers to NZ$5.0 million. The net cash outflow from operating activities stood at NZ$3.73 million. During Q1 FY21, the company raised capital worth A$34 million, comprising a share purchase plan of A$9 million and a placement of A$28 million. Also, the company closed FY20 with a decent cash balance, which allows it to capitalise on potential acquisition opportunities. At the end of the quarter, the cash on hand stood at NZ$67.5 million.

Operating Cash Flows Statement (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 34.27% of the total shareholding. Harbour Asset Management Limited has the maximum shares in the company at 7.89%. Allen (Roger) is the second-largest shareholder, with a holding of 7.41%.

Top Ten Shareholders (Source: Refinitiv, Thomson Reuters)

Key Metrics: In FY20, the company had a gross margin of 85.9%, which is higher than FY19 and FY18 figure of 82.6% and 77%, respectively, representing decent fundamentals.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Risk Analysis: The company is exposed to financial risks such as interest rate risk, foreign currency risk and liquidity risk. Liquidity risk arises from the inability of the company to pay off its obligations. VHT continuously monitors the forecast and actual cash flows to manage the liquidity risk.

Outlook: The company is focused on long-term SaaS contracts. The company seems well placed against its peers, supported by a robust balance sheet and access to additional capital. Going forward, the company expects to increase its sales team across regions (US, APAC, Europe) 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. The company is also working towards restraining costs and optimizing work, with the integration of MRS Systems. The company’s efforts in 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 with minimal customer churn risks. Also, the company remains on track to grow the engineering team to accelerate the core functionality of VolparaDensity and VolparaEnterprise.

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 company is currently trading slightly below the average of its 52-week trading range of A$0.79 - A$2.170. The stock has a market cap of ~A$326.06 million. The company gave a positive return of ~13.04% in the last six months. 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 fundamental analysis standpoint, the company has recorded a revenue CAGR of 90.1% over the last three years (FY17 – FY20). On a technical analysis front, the stock has a support level of ~$1.261 and a resistance level of ~$1.436.  Considering the above factors, we have valued the stock using EV/Sales multiple based illustrative relative valuation approach, and for that purpose, we have considered peers such as Pro Medicus Ltd (ASX: PME), Nanosonics Ltd (ASX: NAN) and Telix Pharmaceuticals Ltd (ASX: TLX), etc. 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$1.31, up ~0.769% on 16 September 2020.

VHT Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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