Monash IVF Group Limited

Expansion Through Acquisitions & Partnerships: Monash IVF Group Limited (ASX: MVF) provides Assisted Reproductive Services in Australia and Malaysia.

The company recently updated that five Victorian based fertility specialists, currently referring patients for IVF treatment to the company, will cease using the company’s services from September 2019. If the doctors cease using the services in the first quarter of FY20, the management expects the net profit after tax for the year ended 30 June 2020 to see a monetary impact in the range of $1.5 million to $2.5 million. For the year ended 30 June 2019, the group of doctors collectively generated a revenue of approximately $5.9 million.

Acquisition: The company recently completed the acquisition of Fertility Solutions, based in Queensland. The acquisition brought in six fertility specialists to the company’s clinician network. The transaction involved an initial cash consideration of $2.1 million on a debt free basis, with the potential of additional earn out payments over a four-year period to 30 June 2023.

1HFY19 Highlights: During the first half, the company reported revenue amounting to $77.2 million, up 0.3% in comparison to prior corresponding period revenue of $77.0 million. Underlying EBITDA for the period was reported at $19.3 million, down 7.0% on prior corresponding period value of $20.8 million. Underlying NPAT for the period stood at $10.7 million, down 11.3% on pcp NPAT of $12.1 million. Over the period, the company strengthened its balance sheet with net debt to equity ratio reducing by 4.5% to 51.9%. A reduction of $5.0 million in borrowings resulted in an improved leverage ratio of 2.36x.


1HFY19 Financial Summary (Source: Company Reports)

FY19 Outlook: In FY19, the company expects to achieve a moderate underlying growth in underlying NPAT as compared to pcp. NPAT growth in 2H19 is expected to be greater than 15% as compared to pcp.

Stock Recommendation:The stock of the company generated returns of 52.97% over a period of 6 months. During the first half, the company’s net profit after tax exceeded the guidance provided at the AGM. EBITDA margin for the period stood at 25.0%, representing an improvement in comparison to H2FY18 EBITDA margin of 23.5%. The margin was much higher than the industry median of 7.5%. The company is focused on expanding its footprint through new clinics. For instance, the acquisition of Fertility Solutions added two clinics in the company’s network in the Sunshine Coast and Bundaberg. The company is now looking at more such acquisitions or partnerships to support its Asia Pacific expansion strategy. In the past 24 months, the company has added to its pool of new fertility specialists through recruitment of 16 fertility specialists. Based on the aforesaid factors, we give a “Hold” recommendation on the stock at the current market price of $1.040, down 26.502% on 22 August 2019 as in September 2019, the company will see five Victorian based fertility specialists ceasing the usage of its services that will impact the profitability in the range of$1.5 million to $2.5 million.
 

Virtus Health Limited

Change in Revenue-Mix Impacted EBITDA Margin in Australia: Virtus Health Limited (ASX: VRT) is engaged in provision of fertility services, medical diagnostic services and medical day procedure services.

Shareholding update: The company recently updated that Merlon Capital Partners Pty Ltd ceased to be a substantial shareholder of the group since 20 August 2019. In addition, the company also notified that the voting power of Challenger Limited reduced from 8.06% to 6.92%.

FY19 Financial Performance: During the year, the company reported revenue amounting to $280 million, up 6.1% on previous year. EBITDA for the year stood at $63.5 million, down 2.3% in comparison to the previous year. NPAT attributable to ordinary equity holders was reported at $28.4 million, declining at a rate of 7.6% on prior corresponding period. Earnings per share in FY19 stood at 35.37 cents, falling 7.6% in comparison to the previous year. The company declared a fully franked final dividend of 12 cents per share. It will be paid on 25 October 2019 with an ex-date date of 3 October 2019.


FY19 Financial Results (Source: Company Reports)

Segment Performance: During the year, revenue from the Australian segment remained in-line with pcp at $218 million, despite overall cycle mix change. On the international front, the company saw revenue from Irish operations increased by 0.7% on pcp. In UK, the company reported revenue amounting to £3.1 million with a softer than expected positive EBITDA. Volumes and EBITDA from the Singapore operations continued to grow during the period. Danish clinics posted mix set of results with revenue at DKK13.4 million in FY19 as compared to DKK20.9 million in FY18.

FY20 Outlook: In Australia, the company aims to grow its low-price volume services, diagnostic revenue and non-IVF day hospital revenue during FY20. In addition, the company is also planning to expand its international revenue through organic activities and acquisitions in targeted international markets.

Stock Recommendation: The stock of the company generated returns of -9.38% and 12.11% over a period of 1 month and 3 months, respectively. In FY19, changes in revenue mix impacted the EBITDA margins in Australia. The company made significant investments in infrastructure, people, and technology. The company is now aiming for growth in Australia through advanced technologies, recruitment of specialists and other business development initiatives. In FY19, the company had an EBITDA margin of 21.5%, which is higher than the industry median of 15.4%. Net margin for the year was reported at 10.4% as compared to the industry median of 3.3%. Considering the above factors, we give a “Hold” recommendation on the stock at the current market price of $3.990, down 8.276% on 22 August 2019.

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