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.

VHT Details

Strong Liquidity Position & Synergies From Acquisitions 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 artificial intelligence imaging knowhows accessible with VHT aids 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.

The company remains on track to witness enormous growth by almost every mean. In the last three years alone, VHT has expanded in size, thereby strengthening its foothold across the globe. Notably, patients can experience greater personalised screening practice across North America, Australia, and New Zealand. The company’s ground-breaking products are bolstered by an ever-increasing number of patents, trademarks, and regulatory approvals, including FDA clearance and CE marking, in the breast screening industry. Notably, the company’s product now includes lung cancer screening. This interlinked growth space is expected to aid the company, thereby increasing its revenue base and financial stability. 

VHT had also informed the market regarding the changes to its business strategy and executive team. The company stated that its business strategy is currently accelerating its transformation to new digital approaches. This transformation is likely to generate increased demand from clinical sites and will increase the number of women that take benefit from its suite of products. The company also appointed Katherine Singson for the role of CEO of Volpara Solutions, Inc. (US subsidiary of VHT) to finish the digital transformation and drive continued growth in Annual Recurring Revenue (ARR).

In FY20, VHT made substantial investments in R&D and engineering of ~NZ$11 million. The company had greater than 10 million US women, and ~300k Australian women, who availed the advantages of a safer and more relaxed breast cancer screening facility. In FY20, Annual Recurring Revenue (ARR) came in at NZ$18 million, an increase of 172% on pcp, thanks to organic & inorganic growth. The period covered ~27% of the women that get screened each year in the US.

The company’s non-GAAP revenues went up by a substantial 226% from the prior corresponding period and came in at NZ$16.3 million for FY20. IFRS Revenues in FY20 increased by 153% year over year and came in at ~NZ$12.6 million, owing to 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 reported net loss of NZ$18.8 million. Notably, cash on hand increased from NZ$12.9 million reported at the end of FY17 to NZ$31.4 million reported at the end of FY20, with nil debt. After the successful completion of the share purchase program on 18 May 2020, VHT’s cash balance stood at NZ$69 million, aiding the company to pursue for prospective strategic acquisitions and expand its product offering. Operating cash outflow stood at NZ$15.9 million in FY20 as compared to a cash outflow of NZ$10.6 million in FY19.

Key Financial Highlights (Source: Company Reports)

2QFY21 Key Business Update: At the end of Q2FY21, the company reported a growth of NZ$850K in ARR to NZ$19.9 million, driven by customer additions and upsells, movements in foreign exchange along with new deal wins. During the second quarter, the company also recorded a new Software-as-a-Service (SaaS) sales. The Average Revenue Per User (ARPU) increased ~6% from previous quarter to US$1.16, with the ARPU for deals in Q2 ranging from US$1.75 to US$4.30. This depicts that the company is well placed to leverage the upselling opportunities as its legacy capital users are moving to SaaS, with the exciting new integrated breast care platform. However, COVID-19 related cost pressures pose challenges to the company pertaining to its legacy capital sale customers. To counter this headwind, VHT took necessary steps to move all legacy sites to SaaS platform.

VHT reported a growth of 16% in subscription receipts from customers to NZ$4.7 million. Cash receipts from customers remained robust despite COVID-19 led disruption and depicted the company’s fifth straight quarter with cash receipts from customers of more than NZ$4.5 million. The net cash outflow from operating activities stood at NZ$3.5 million in 2QFY21. Also, the company closed 2QFY21 with a decent cash balance, which allows it to capitalise on buyout opportunities. At the end of the quarter, the cash on hand stood at NZ$64.2 million. For the period ended 30 September 2020, the company reported unaudited revenue of NZ$9.5 million, which increased 38% from the prior corresponding period. Subscription revenue increased 71% during the period on a year over year basis.

Cash Receipts (Source: Company Reports)

MRS Acquisitions Remains a Key Catalyst: At the end of June 2019, VHT acquired MRS Systems, Inc., which is engaged in providing mammography reporting systems to more than 1,600 breast clinics and hospitals, 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. Revenue related with the capital model increased in Q2FY20 post the buyout of MRS.

Net Cash Flow (Source: Company Reports)

Key Update: On 26th October 2020, the company informed the market that it has unveiled new strategies by partnering with Sheila R. Veloz Breast Center in California. The latest move will assist the company to bring image-improved reporting directly to women. This new strategy marks another milestone for the industry to innovate and help prevent advanced stage breast cancer.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 34.06% of the total shareholding. Harbour Asset Management Limited has the maximum shares in the company at 7.85%. Allen (Roger) is the second-largest shareholder, with a holding of 7.36%.

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. Over the past three years, the company is making efforts to improve its EBITDA margins, operating margins, and net margins. Similarly, the company is also making efforts to improve its ROE for the same time span.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Key Risks: The main risks VHT is exposed to through its financial instruments are foreign currency risk, interest rate risk, liquidity risk and credit risk. Also, stiff competition from peers remains a potential concern. Further, COVID-19 related uncertainties and higher operating expenditure may weigh on financial performance, going forward. VHT continuously monitors the forecast and actual cash flows to manage the liquidity risk.

Future Expectations: Going forward, the company seeks to continuously enhance its business via organic growth through higher investments and high-quality care facility. A healthy balance sheet will aid the company to attain its long-term objectives of expanding the business through acquisitions and delivering continued growth in shareholders’ returns. Given its decent cash position, the company will also consider potential quality business opportunities as acquisition targets for future growth. Going forward, the company expects to increase its sales team across regions (US, APAC, Europe) with a full suite of products. VHT remains on track to focus on long-term SaaS contracts, which stands to benefit even with COVID-19 outbreak.

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 below the average of its 52-week trading range of A$0.79 - A$2.170. The stock has a market cap of ~A$319.79 million. The company gave a negative return of ~3.3% in the last three months. VHT is working towards restraining costs and optimizing work, with the integration of MRS Systems. On a technical analysis front, the stock has an immediate  support level of ~$1.27 and an immediate resistance level of ~$1.432. 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). 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 ~2.745% on 4 November 2020.

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

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