The company which is the biggest IVF provider in Australia has released a revised earnings forecast based on its current trading activity and expects to produce a modest increase in net profit after tax (NPAT) for the financial year ended 30 June 2015. In February, the company had issued guidance that growth would be in the low to mid teens before non-recurring items totalling $ 2.1 million. Now the company expects to achieve low to mid single digit percentage growth before non-recurring items totalling $ 2.3 million as a result of cycles which are lower than forecast.
 
Growth has also been affected by other factors. Though market growth in NSW has improved in the three months to 30 April 20 15 by 6% compared to the previous year, the company has not been able to achieve comparable cycle growth and attributes the market growth to the bulk bill provider. There is also been a disruption cycle volume because of the temporary closure of the Maroubra facility in Sydney at the end of April because of storm damage. Current patient care continues though new patient consulting activity is not likely to return to normal until the reopening of the facility in August 2015. In addition, a small amount of market share in Victoria and Queensland has been lost in the three months to 30 April 2015 and the state markets have remained weak with market growth in Victoria of 1% and in Queensland of a -4% compared to the previous year. The start-up volumes of the Singapore operation has been slower than was anticipated and the focus EBITDA loss in the second half is expected to be around $ 1 million.
 
Results for the first half of 2015
 
The company reported growth in revenues and market share in Australia despite the comparatively weak local conditions. Among the highlights were 12.9% growth in revenue to $ 114.5 million, 2.6% increase in EBITDA to $ 32.8 million, 2.2% increase in EBITDA in the Australian segment to $ 36.8 million, increased market share in Australian Assisted Reproductive Services despite the market contraction, contribution of $ 10.4 million from revenues from international operations and continued growth from Day Hospital and Specialist Diagnostics.
 
Net profit after tax (NPAT) from ordinary activities was up by 1.8% to $ 17.2 million from $ 16.9 million in the previous period. Reported NPAT was down 1.2% to $ 16.7 million from $ 16.9 million in previous period. Net profit before tax includes commissioning and setup costs in Singapore of $ 911,000, transaction costs for acquisitions of $ 857,000, a charge of $ 653,000 for the write-off of unamortised bank facility fees for the retired bank facility and a gain of $ 300,000 on the investment in Sunshine Coast. Net profit before income tax adjusted for these items would have been an increase of 7.5% compared to the previous year to $ 25.8 million.
 
The company has announced the payment of an interim dividend fully franked of $ .13 per share up 1% over the previous year. CEO Sue Channon said that these results demonstrate how the collective strength of core fertility services combined with the benefits of specialist diagnostic testing and day hospital services can deliver growth despite the contraction in the Australian ARS market. The company's market share in Australia grew to 45.6% in the first half compared with 45% in the previous year. Total ARS market volumes in New South Wales, Queensland and Victoria shrank by 0.9% in the first half and the outlook for the markets of the eastern states remains subdued. The company cycle numbers increased by 0.4% to 7646.
 
The specialist diagnostic services and day hospitals continued to grow with diagnostic revenue growing 17.3% compared with the previous year and day hospital revenue growing 3.7%. The day hospitals in Sydney and East Melbourne have been witnessing utilisation rates and process efficiencies. The joint venture City West Specialist Day Hospital achieved strong results after adding non-IVF procedures from the public and private sectors. Non-IVF procedure revenue in day hospitals has risen by 8.7% and now accounts for 56% of day hospital revenue. The operation in Ireland, Sims Clinic, performed well contributing $10.4 million to revenue, with first half volume growth of 25%. Group EBITDA increased 2.6% to $32.8 million from $32.0 million in the previous year with EBITDA in the Australian segment increasing 2.2% to $36.8 million.
 


Financial highlights (Source: Company Reports)
 
 
 
Australian market share growth
 
The company's market share at 45.6% is up 0.6% in the last 12 months and overall cycles are up 0.4%. Because of the evolution of scientific and clinical practice, the patient journey and the revenue mix are changing. Market share was gained in New South Wales and Victoria despite the movements in the broader context of a decline of 0.7% in New South Wales and 2.1% in Victoria though Queensland grew by 0.7%.


IVF Cycles (Source: Company Reports)
 
Strategy and Outlook
 
The company will continue to focus on patient outcomes and continued growth will be underpinned by the experience of the collective team. The unique collaboration on Assisted Reproductive Services will continue to drive patient outcomes and the ability to enter new markets as well as the ability to grow in both existing and new markets. Reproductive medicine continues to evolve as optimal treatment changes and the company network facilitates the delivery of best practice and optimises market penetration. Further domestic and international opportunities are under review and high priority is being given to the profitability of international operations. Additional organic growth will be driven by multiple sources of revenues in the form of Specialist Diagnostics and Day Hospital.


Virtus Health Daily Chart (Source - Thomson Reuters)

Though the company has done well in maintaining its growth in market share, the headwinds will continue in the form of the market contraction and this must, in our opinion, necessarily put question marks about the future growth prospects. Further evidence of this comes from the downward revision of the guidance As such, we believe that the stock is overvalued and expensive at the current price and would not recommend an investment at the moment.
 

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