Company Overview: Volpara Health Technologies Limited (ASX: VHT) is engaged in providing 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 on lowering the death rate and cost of breast cancer via Volpara software.

VHT Details

Acquisition Synergies and Contract Wins Aid VHT: Volpara Health Technologies Limited (ASX: VHT) is engaged in the early detection of breast cancer by utilising health technology software. The artificial intelligence imaging knowhows accessible with the company aids to enhance 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.

On 20 April 2021, the company informed the market regarding its 4QFY21 update. During Q4FY21, the company reported a growth of NZ$1.6 million in ARR to NZ$27.9 million. The quarterly figure included the impact of recently acquired CRA Health, LLC. Organic growth, which excluded the CRA Health business, depicted a 20% organic increase in ARR on a year over year basis.  During the quarter, the company expected a minimum of one software product, which was availed for the screening of ~32% safer and more relaxed breast cancer screening facility for women in the US. Notably, in 4QFY21, VHT’s Average Revenue per User (ARPU) stood at US$1.40, as compared to US$1.22 at the end of Q3FY21.

On 2 February 2021, the company had acquired CRA Health LLC for a consideration of US$18.0 million to buy all outstanding equity of CRA, with an addition of US$4.0 million payable upon the accomplishment of key ARR performance over the next 18 months. CRA is one of the top providers of risk assessment tools within major Electronic Health Record (EHR) systems. The CRA buyout adds a significant milestone for Volpara and aids the company to accelerate its mission to protect families from cancer by preventing advanced-stage breast cancer.  The company had also announced about signing its highest value contract worth over US$400,000 per year of ARR through its subsidiary CRA Health subsidiary. The management is positive about the signing of the contract and believes it will improve the sales of additional products.

The company witnessed a CAGR of ~70.54% in revenue over the period 1HFY17-1HFY21. 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$7 million in 1HFY17 to ~NZ$64 million in 1HFY21.

1HFY21 Key Highlights (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders together form around 34.51% of the total shareholdings, while the top 4 constitutes the maximum holding. Harbour Asset Management Limited and Allen (Roger) are holding a maximum stake in the company at 7.84% and 7.36%, respectively, as also highlighted in the chart below: 

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group 

Healthy Balance Sheet and Decent Liquidity: At the end of 1HFY21, the company’s cash balance came in at NZ$64.3 million, up from NZ$31.4 million at the end of FY20. In 1HFY21, the company undertook successfully capital raising of A$37Mn in an oversubscribed funding to strengthen the balance sheet in order to face the effects of COVID-19. This provides Volpara with substantial flexibility to gauge potential strategic acquisitions and expand its product offering. Operating cash outflow stood at NZ$7.78 million in 1HFY21. The Group had NZ$2.6Mn of debt in the form of the US Government COVID-19 loan at the end of 1HFY21.  Total debt at the end of the period stood at ~NZ$5.9 million.

The company is making efforts to improve its EBITDA margins, operating margins, and net margins. In 1HFY21, gross margin stood at 91.7%, higher than the 1HFY20 figure of 88.7%. In the same time span, the company had a current ratio of 4.62x, higher than 1HFY20 figure of 3.58x, representing a decent liquidity position.

Profitability and Liquidity Profile (Source: Refinitiv, Thomson Reuters), Analysis by Kalkine Group  

Key Risks: The company’s financial instruments comprise mainly of receivables, payables, bank loans and overdrafts, finance leases, loans from related parties, cash, and short-term deposits. 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, and COVID-19 related uncertainties remains a potential concern. Further, increased costs and expenditure may weigh on financial performance, going forward. VHT continuously monitors the forecast and actual cash flows to manage the liquidity risk.

Future Expectations: VHT has made significant progress towards increasing ARPU. Owing to the continuous tailwinds, which the company is experiencing in the United States, its focus remains on shifting to risk and genetics for FY22, in order to accelerate sales growth. The company aims to provide women with the required data in a form of new patient letter to make informed decisions commencing in October 2021. As a growing SaaS based company, VHT remains on track to release new branding, product naming, website, etc., in the coming days. Further, the company seeks to continuously enhance its business via organic growth through higher investments and high-quality care facility. A healthy 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.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative) 

Data Source: Refinitiv, Thomson Reuters, 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: Currently, the stock is trading below the average of its 52-week’s high and low level of $1.715 and $1.19, respectively, proffering an opportunity for share accumulation. The stock of the company has corrected by ~6.48% in the past three months. On a technical analysis front, the stock has a support level of ~$1.263 and a resistance level of ~$1.536. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). We believe that the company might trade at a slight discount as compared to its peer median, considering its supply chain disruption risk, increased costs and expenditure associated with developing breast imaging analytics services and products, foreign currency risk and strict regulatory approval, etc. For that purpose, we have considered peers such as Nanosonics Ltd (ASX: NAN), Ansell Ltd (ASX: ANN), to name a few. Considering strong 4QFY21 and 1HFY21 performance, VHT optimistic outlook on increasing ARPU in coming years, higher demand for breast imaging analytics products, decent liquidity position, current trading level, and valuation, we recommend a ‘Buy’ rating on the stock at the current market price of $1.330 (as provided in the chart) as on 21 April 2021.

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

Note: 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.

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