Virtus Health Limited

VRT Details

Key Updates for Investors Consideration: Virtus Health Limited (ASX: VRT) is in the provisioning of fertility services, medical day procedure services and medical diagnostic services in Australia, Denmark, the UK, Ireland and Singapore. Recently, Wilson Asset Management Group has made a change to holdings in the company with a voting power of 7.67% against the previous voting power of 6.42%.

• The company has recently noted a judgment released by the Federal Court of Australia in relation to the application submitted by ACCC. The court has temporarily held the proposed acquisition of Adora Fertility and three-day hospitals (Acquisition) from Healius Limited (ASX: HLS) until its concerns about the Acquisition are resolved. However, the company would continue to defend the proceedings.
• From 1 November 2021, VRT has commenced to receive new funding from the Australian Government, wherein VRT would receive Medicare reimbursement for the screening of serious genetic conditions via Pre-Implantation Genetic Testing (PGT) services within the IVF process. VRT has invested in its already market-leading capability in Reproductive Genetics as part of its strategic growth plan.
• The company believes that the risk from the uncertainty in relation to the COVID-19 Delta outbreak has decreased on its balance sheet, backed by strong vaccination rates, and easing restrictions.

FY21 Financial Summary:

• Growth in Topline: For the year ended 30 June 2021, the company recorded revenue amounting to $324.6 million as compared to $258.9 million in FY20. This was backed by strong performance in Australian and International operations with ARS recovery and progressive market growth.
• Increasing Earnings: Reported EBITDA and NPAT for the year amounted to $93.4 million and $43.1 million against $46.2 million and $0.5 million in FY20, respectively.

Revenue & EBITDA (Source: Analysis by Kalkine Group)

Key Risks:

• Increased Competition: The company operates in a very competitive environment, which may impact the company’s market share and hamper its financial position.
• Regulatory Risk: VRT is currently surviving a legal case filed by ACCC in relation to the proposed acquisition of Adora Fertility and three-day hospitals (Acquisition). Any failure in receiving approval could impact the operational health of the business.

Outlook:

• Looking forward, the company believes that it is well-placed to deliver on its growth strategy. This would be underpinned by the rising demand for ARS in FY22.
• The company would also make significant investments in new clinics to support growth. VRT is also developing an ecosystem with investments in new operating models (capital light VaaS) & collaborations with startups to develop new tests and technologies.
  

Valuation Methodology: P/E 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: During FY21, the company cemented its balance sheet, evident by an improved net debt position of $107.1 million as on 30 June 2021 against $126.0 million as on 30 June 2020. As a result, VRT’s leverage ratio also improved to 1.5x at the end of FY21 as compared to 2.2x as on 30 June 2020. The stock of VRT is trading below its 52-week low-high average of $4.740 - $7.470, respectively. The stock of VRT has been corrected by ~25.20% and ~8.54% in the past three and six months, respectively. The stock has been valued using the P/E multiple-based illustrative relative valuation and arrived at a target price of low double-digit upside (in % terms). The company can trade at a slight discount to its peers’ average P/E multiple, considering the low current ratio, high debt to equity ratio, and regulatory risk arising from ACCC’s legal case. For the purpose of valuation, peers such as Monash IVF Group Ltd (ASX: MVF), Healius Ltd (ASX: HLS), and Sigma Healthcare Ltd (ASX: SIG) have been considered. Considering the expected upside in valuation, funding from the Australian Government, growing topline and bottom line, high gross margin and ROE, decent outlook, current trading levels, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $5.350 as on 08 November 2021, 10:30 AM (GMT+10), Sydney, Eastern Australia.

VRT 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. 

Technical Indicators Defined:

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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