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. 

VHT Details

VHT Rides on Decent Financial & Operational Fundamentals: Volpara Health Technologies Limited (ASX: VHT) is a New Zealand based health technology software 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 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 and analysis products. The company is seeking to continuously enhance its business through organic growth, higher investments, and high-quality care facility. 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.

Despite the continuing challenges of the COVID-19 pandemic, the company secured several contracts in 4QFY21, depicting a strong clinical requirement for VHT’s products, global strength of its sales and marketing teams, and the successful pivot to focus more on risk and genetics. In FY22, the company expects to come out stronger from the global uncertainties led by COVID-19 virus outbreak and accelerate growth strategies with CRA Health acquisition in early February 2021.

The company witnessed a CAGR of ~102.47% in revenue over the period 1HFY19-1HFY21. The company’s SaaS-based platform along with higher investment aided the growth. Moreover, VHT’s product suite has increased over the time, letting its ARPU from new and existing customers grow year over year. The momentum is expected to continue in the days ahead.

Past Performance; Analysis by Kalkine Group

Acquisitions Remain Key Catalysts: In February 2021, the company completed the acquisition CRA Health, LLC, one of the top providers of risk assessment tools within major EHR systems, for a consideration of US$18 million. The CRA Health, LLC, acquisition is line with VHT’s 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. VHT remains positive on the signing of the contract and believes it will improve the sales of additional products. The company had also entered into an agreement to buy US-based MRS Systems. 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.

Acquisition Synergies (Source: Company Reports)

Q4FY21 Business Update: Recently, 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. During the quarter, the company’s sales mix consisted of its largest contract to date, which was announced in early March 2021. The company also witnessed expansion in its various existing customer base. This prevailing trend of its expanding customer base aids the company to accelerate personalised breast cancer care with strictly integrated breast density, cancer risk, and patient reporting. 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.

Key Metrics, Healthy Balance Sheet and Decent Liquidity: At the end of 4QFY21, cash balance stood at NZ$32.2 million. During the quarter, cash receipts from customers went up by 15% year over year and came in at NZ$5.4 million. Notably, subscription-based receipts in FY21 increased 39% on pcp and stood at ~NZ$18.3 million. Unaudited cash receipts for FY21 came in at NZ$19.7 million, depicting a rise of 20% on pcp. Net operating cash outflow in Q4FY21 stood at NZ$3.2 million, at par with the prior quarter and ahead of expectation. Net operating cash outflow for FY21 stood at NZ$13.5 million, depicting an improvement of 15% on pcp. At the end of 1HFY21, the company’s cash balance came in at NZ$64.3 million. Total debt at the end of 1HFY21 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, signifying a decent liquidity position.

Profitability and Liquidity Profile; Analysis by Kalkine Group  

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: 

Top 10 Shareholders; Analysis by Kalkine Group  

Risk Analysis: VHT operates in a highly competitive environment, which is subject to ongoing significant changes, including business consolidations, new strategic alliances, market pressures, and regulatory and legislative pressures.  The company is also exposed to risk associated with general global economic and market conditions, particularly those impacting the healthcare industry. Also, higher expenditure and adverse currency translations add to the woes. Also, stiff competition from peers, and COVID-19 related uncertainties remains a potential concern.

What to Expect: The company remains on track to focus on accelerating sales growth by shifting to risk and genetics for FY22. This, in turn, is likely to aid the women with proper information required to make informed decisions and is expected to commence in October 2021. The company also remains on track to benefit from organic growth, favorable product mix, strong breast cancer screening software applications business, and the addition of members through new programs and expansions. Going forward, the company’s acquisition strategies, membership growth, expansion of contracts and other investments are expected to boost the top-line growth of the business.

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

Source: 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: 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. The stock of the company has corrected by ~13.48% in the past six months. 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. 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 increased costs and expenditure associated with developing breast imaging analytics services and products, its supply chain disruption risk, foreign currency risk and strict regulatory approval. For that purpose, we have considered peers such as Nanosonics Ltd (ASX: NAN), Medical Developments International Ltd (ASX: MVP), to name a few. Considering acquisition synergies, strong 4QFY21 performance, VHT optimistic outlook, higher demand for breast imaging analytics products, decent liquidity position, valuation, and current trading level, we recommend a “Buy” rating on the stock at the current market price of $1.25, up by ~0.806% as on 26 May 2021.

VHT Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: 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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