Company Overview: Volpara Health Technologies Limited (ASX: VHT) is a New Zealand based health technology software company, which is engaged in providing digital health solutions relating to breast cancer. The artificial intelligence imaging technologies 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.

VHT Details

VHT Rides on Decent Balance Sheet and Organic Growth: Volpara Health Technologies Limited (ASX: VHT) is a health technology 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. Notably, on 19 October 2020, the company’s Volpara Solutions became Volpara Health, reflecting its vision and mission to empower women to demand more involvement in breast cancer prevention and care.

After finishing FY20 on a good note, the company managed to adapt quickly and embrace the uncertainties of a new world and reported a remarkable result in 1HFY21. Previously, the company reported a positive 2QFY21 results, wherein it reported Annual Recurring Revenue (ARR) of 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 recorded a new Software-as-a-Service (SaaS) sales. Further, VHT’s subscription receipts from customers stood at NZ$4.7 million, depicting a rise of 16% year over year. Cash receipts from customers continued to be strong despite COVID-19 led disruption and portrayed VHT’s fifth straight quarter with cash receipts from customers of greater than NZ$4.5 million.

Coming back to 1HFY21 results, the company’s ARR came in at NZ$19.9 million, up from NZ$15.7 million reported in the year-ago period and 10.6% from FY20. This resulted in an increase in revenues, which came in at NZ$9.5 million, up 38% year over year, owing to higher subscription revenue, which soared 71% year over year.  Although, the company reported loss after tax of NZ$8.9 million in 1HFY21, VHT remained in a decent financial position with a cash balance of ~$64.3 million and debt amounting to ~ NZ$2.6 million at the end of 30 September 2020. The company continued to invest higher in research and development and unveiled Volpara Breast Health Platform, an end-to-end solution, which assists in the delivery of personalised patient care.

Operating loss for the period came in at NZ$9.8 million, owing to team expansion and scaled up operations. Gross Profit  for the period stood at NZ$8.7 million, reflecting an increase of 43% year over year and gross margins for the period (1HFY21) came in at 92%, which expanded ~300 basis points on pcp, driven primarily by the legacy MRS products' high gross margins, along with high efficacy on cloud deployments. Sales & Marketing and General & Administration expenses for the period soared slightly, up 11% and 12%, respectively, owing to cost-control measures implemented by VHT in 1HFY21. Non-GAAP earnings before tax, depreciation, amortisation, impairment, one-off items, and non-cash items came in at NZ$6.3 million, as compared to NZ$6.8 million in the year-ago period.

Key Financial Highlights (Source: Company Reports)

Capital Raising Program: The company strengthened its balance sheet in order to stay afloat during the COVID-19 led uncertainties. In doing so, the company undertook a capital raising program of ~NZ$39.5 million in oversubscribed funding and prepared itself for any mergers and acquisitions prospects that might arise due to COVID-19. These initiatives will aid the company to pursue for prospective strategic acquisitions and expand its product offering. Net operating cash outflow stood at NZ$7.8 million as compared to a cash outflow of NZ$7.9 million in 1HFY20. The company also executed various important changes to the business, which included digital marketing, moving towards marketing directly to women and welcoming Katherine Singson for the role of CEO to its US subsidiary to finish the digital transformation and drive continued growth in ARR. Notably, ~27% of women having VHT product applied on their images as compared to ~25.8% at the end of 1HFY20

The company remains on track to grow its SaaS business, which is depicted by cash inflows and represents that the company is progressing well towards its mission of being self-sustainable. In 1HFY21, the company’s cash receipts stood at NZ$9.6 million, up 33% year over year. It is worth noting that the company completed MRS Systems, Inc. acquisition at the end of June 2020, and it’s now been three and a half months with the integration.  The acquisition gave opportunity to the company to work towards its restructuring plan, especially in terms of Sales & Marketing. The company has made progress and continues to focus on efficiencies in all areas of the business. Total operating expenses for 1HFY21 came in at NZ$19.3 million.

Operating Expenses (Source: Company Reports)

VHT Collaborates with DetectED-X: On 17 November 2020, the company collaborated with DetectED-X to unveil a BreastED, a first-of-its-kind online breast density training tool. This new product marks another milestone for the industry to innovate and help prevent advanced stage breast cancer. Through this partnership, VHT will be able to make BreastED, available to clinicians. The latest product is gaining popularity by aiding radiologists to improve their ability to consistently perform BIRADS density assessment, in light of expected FDA density reporting regulations.

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 1HFY21, the company had a gross margin of 91.7%, which is higher than 1HFY20 and 1HFY19 figure of 88.7% and 83.4%, respectively. In the same time span, the company recorded current ratio of 4.62x, which is higher than 1HFY20 figure of 3.58x, demonstrating a sound liquidity position. The company remains on track to continue investing in key areas with robust cash balance, which provides the company with ample available liquidity for unforeseen events. Over the past three years, the company is making efforts to improve its EBITDA margins, operating margins, and net margins. Debt to Equity of the company stood at 0.07x in 1HFY21, slightly above the year-ago figure of 0.06x.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Key Risks: The Group’s principal financial instruments comprise receivables, payables, cash, cash on deposit and borrowings, which exposes the company to foreign currency risk, interest rate risk, liquidity risk and credit risk. Further, increasing expenses, vigorous competition from peers remains a potential concern. Also, integration risk, and COVID-19 related uncertainties on its business operations may weigh on financial performance, going forward.

What to Expect: Going forward, the company expects to continue to drive innovation by release of refreshed branding, product naming, website, etc.  The company expects to continue sales growth at the Volpara Breast Health Platform and increase multiple product sales into its existing customer base and improve overall customer experience.The company remains on track to lower its churn rate, even during the COVID-19 pandemic. The company has a pipeline of new deals lining up, thanks to networks, customer referrals, and digital marketing, and expects organic growth in the near-term, through higher investments and high-quality care facility. The company also expects to release the FDA’s breast density legislation, which is being delayed due to 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: VHT remains focused on long-term SaaS contracts, which continue to gain even with COVID-19 outbreak. A healthy balance sheet will aid the company to expand its business through acquisitions and enhance shareholders’ value. The company is currently trading slightly above the average of its 52-week trading range of A$0.79 - A$1.925. The company gave a positive return of ~8.9% in the last pat one-month period. On a technical analysis front, the stock has a support level of ~$1.267 and a resistance level of ~$1.551.  Considering the above factors, we have valued the stock using an 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), to name few. As a result, we have arrived at a target price of low double-digit growth (in percentage terms). Considering, increased focused on long-term SaaS contracts, strong liquidity position, decent 1HFY21 fundamentals, acquisition synergies and capital raising program, we recommend a “Buy” rating on the stock at the current market price of A$1.40, up ~1.449% on 2 December 2020.

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

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