Acquired IDS Pathology laboratory in Sydney:

Company Overview (Source: Company Reports)

Virtus Health Ltd (ASX: VRT) acquired Sydney based Independent Diagnostic Services (IDS), a general category pathology laboratory, which reported a revenue of $2.9 million for the fiscal year of 2015. This move by VRT would strengthen the group’s diversification strategy of growing its specialist diagnostics capability as IDS has a network of seven collection centers at southern suburbs of Sydney. IDS laboratories would also boost the group’s diagnostic structure. Virtus can also leverage IDS experienced staff of 36 members with scientists and support staff across services like hematology, microbiology, biochemistry, serology and immunology pathology. Dr Tony Stoloff, founder of IDS continues to be part of the Virtus Health Specialist Diagnostics team. Meanwhile, Virtus intends to improve its capacity to launch new genetics based testing capabilities like Next Generation Sequencing for internal as well as external referrers, by leveraging its in-house comprehensive pathology service and diagnostics division. The group already launched pre-conception screening through its Next Generation Sequencing that screens 550 genes for diseases with major pediatric morbidity.
 

Acquisitions coupled with international growth drove FY15 Performance:

Virtus Health reported a revenue growth of 16.1% year on year (yoy) to $233.7 million in FY15, against $201.2 million in prior corresponding period (pcp), boosted by the group’s domestic acquisitions and improved international operations performance. The group’s earnings before interest, tax, depreciation and amortization surged 3.3% to $61.4 million in FY15, as compared to the corresponding prior fiscal year, while adjusted EBITDA improved by 4.6% yoy to $63.1 million. This increase was driven by the improved activity of the group’s low cost offering in Australia, fertility clinics and first time contribution from Ireland operations. Meanwhile, fixed expenses rose by 5% on a like for like basis (adjusted for acquisition timings) although the rate of increase is declining. Adjusted net profit after tax (without non-recurring items and non-cash acquisition related interest) rose 5.1% yoy to $33.6 million during the period while the reported NPAT fell by 4.7% yoy to $29.4 million. The group incurred $3.2 million after tax of non-recurring expenses and non-cash acquisition related interest. This includes Singapore startup costs of $0.91 million and acquisition transaction costs of $1.15 million. Virtus Health slightly improved its full year dividend to 27 cents per share in FY15 against 26 cents per share in FY14. VRT has capacity for investing over $55 million while its gearing ratio is 2.1x adjusted EBITDA.
 

Results Overview (Source: Company Reports)
 

Australian Segment highlights:

The group’s Australia Segment EBITDA rose only 1.9% yoy to $68.6 million in FY15 as the major changes at the clinical practice at Melbourne IVF impacted the segment’s growth leading to a decrease in the number of fresh and frozen cycle. As a result, the segment reported a revenue loss of over $3 million during the period against the corresponding period of last year. Moreover, Australian segment’s reported EBITDA margin on total revenue decreased to 32.8% during the fiscal year of 2015, as compared to 32.9% in the fiscal year of 2014. The average number of cycles per fertility specialist fell by 7.9% yoy to 164 against pcp and frozen embryo transfers also decreased in VIC. However, Melbourne IVF started delivering better implantation rates for fresh and frozen embryos. The Australian operations delivered over 15,100 fresh cycles during the period and improved footprint through greenfield and acquisitions. Revenue in day hospitals improved by 4.3% yoy while the non-IVF revenue surged by 8.7% yoy against the pcp. Average number of fertility specialists surged 9.9% against the prior corresponding period, as clinicians were added through the group’s acquisitions. Day hospitals derived over 56% of revenues from non-IVF services. The segment continues to derive growth from specialty diagnostics and generated 14.6% growth during the period, as advanced technology underpins patient outcomes. National market share improved by 0.9% to 37.1% during the period driven by acquisitions. Eastern states market share rose by 0.5% yoy to 44.9% in FY15.

 
Improving Virtus IVF cycles by the group over the last few years (Source: Company Reports)
 

Ongoing Irish operations growth:

As per the group’s international operations highlights, the segment’s EBITDA reached $2.4 million post the loss from Singapore of $1.9 million. On the other hand, the group maintained its market leadership in Ireland and delivered 1,878 cycles across entire Irish operations. Ireland contributed over 6% to the adjusted EBITDA. Sims Clinic Dublin, Rotunda and Cork integration is on track. Sims clinic cycle improved by 11% during the period. Ireland segment was also able to improve its EBITDA margin to 21% from 20% in pcp despite Cork startup and launch costs. With regards to the Singapore highlights, the first branded fertility center is totally operational and 86 cycles were performed during FY15. Clinic volumes across delivered decent performance while VRT continues to focus on its marketing efforts in the country.
 
 
Overview of ARS Market (Source: Company Reports)
 

Clear market leader in ARS in Australia:

Virtus continues to maintain its market leadership position in ARS (Assisted Reproductive Services) in Australia while the fertility centers revenues improved more than estimated. The group also maintained its leadership in Australia’s IVF services and improved its total Virtus IVF cycles to 17,064 in FY15 as compared to 15,021 in the fiscal year of 2014, which includes contribution from TasIVF acquisition. But, Virtus market share in the eastern states (New South Wales, Queensland and Victoria) declined to 44.1% in FY15 as compared to 45.5% in the corresponding period of last year. Nonetheless, VRT improved its cycle activity in New South Wales, indicating its competitive edge in the market. Moreover, the total market also improved in NSW by 4.5% yoy driven by the new entrants who are providing bulk bill services. However, Virtus cycle numbers were under pressure in Queensland and Victoria due to ongoing poor economic conditions impact.

 
Overview of Sub-groups (Source: Company Reports)
 

Strategy ahead:

Virtus intends to focus on expanding in Australia as well as penetrate in international market through acquisitions. Greenfield continues to contribute to the revenue growth going forward. Virtus remains the preferred choice for people looking to have healthy babies according to management, indicating its market leadership. Moreover, management indicated that the group would continue to generate growth for its fertility services given the demographic drivers like women postponing to have children as well as growing incidence of obesity. VRT expects its Non-IVF services also to continue to grow and contribute to the improving day hospital revenues. Apart from Australia and greenfield developments, Virtus is also targeting United Kingdom and South East Asia to boost its international growth. Innovation remains a priority to Virtus and it intends to maintain its advanced treatment procedure and be the forefront player for fertility treatment


 

Stock Performance:

The shares of VRT have been under pressure this year, with the stock delivering a negative year to date returns of over 30%, partly impacted by the rising competition. However, VRT is making solid efforts to drive growth, which could be reflected by its recent acquisition of IDS Pathology laboratory in Sydney. Moreover, favorable demographic drivers in Australia coupled with improving demand across its international operations is expected to drive growth in the coming months. Moreover, the stock generated over 7.6% (as of Sep 29) in the last four weeks, despite the prevailing tough market conditions. VRT is also trading at relatively cheaper P/E of 15x and has a decent dividend yield of 4.9%. Based on the foregoing, we view that investors looking for bargain opportunity could consider adding VRT in their portfolio and accordingly give a “BUY” recommendation at the current stock price of $5.35.


VRT Daily Chart (Source: Thomson Reuters)