1 March 2020
|Date of Report||ASX||Price||Price Target||Analyst Recommendation|
|Date of Report|
|Sector : Healthcare||52-Week Range: A$1.06 – 1.63|
|Industry: Healthcare Services||Market Cap: A$278.0m|
We rate MVF as a Buy for the following reasons:
- High barriers to entry with unique expertise and assets. 40-year heritage of leadership in science and innovation in ARS and women’s imaging, coupled with the depth of experience from the doctors and clinical team which will continue to underpin MVF’s future growth and maintain treatment success rates.
- Ageing Australian population and increased age of mothers (especially with the trend of more females choosing career over family until their early thirties) will provide favourable demographic tailwinds.
- Solid balance sheet with flexibility to execute expansion strategies. Earnings increasingly becoming diversified as the Malaysian business gains momentum.
- MVF has a dominant market position as the second largest player in the industry with ~26% national market share.
- Potential earnings diversification and growth via international expansion and increase presence in diagnostics.
- Demonstrated capacity to perform well in terms of cost out and earnings growth despite tough conditions (i.e. lower cycle volumes).
- Transparent and detailed disclosures.
We see the following key risks to our investment thesis:
- Regulatory risk as changes in government funding may increase patient’s out-of-pocket expenses and thereby volume demand.
- Fluctuations in the availability and size of Medicare rebates may negatively influence the number of IVF cycles administered and overall industry revenue
- The Australian market does not rebound following this period of downturn. Population of males and females with fertility problems decline.
- Loss of market share especially to low-cost providers, with one already appearing in Victoria.
- Weakening economic activity resulting in increased unemployment leading to less disposable income to be spent in IVF treatment.
- Execution of international forays into Malaysia goes poorly.
Figure 1: MVF Treatment Numbers
Despite posting falling headline numbers across the board, Monash IVF Group’s (IVF) FY18 results came largely in line with consensus estimates and within management guidance.
Revenue was down -2.9% to $150.6m, EBITDA dropped -22.2% to $38.1m, while NPAT slumped -27.9% to $21.4m. As has been the case for a number of results now, domestic performance continued to drag on what was otherwise a stellar result for MVF’s Asia Pacific business.
Total International Patient Treatments were up +24.2% on the back of improved market share in Malaysia, reaffirming our confidence in the business model amid a time of wider Group turnaround. Indeed, the departure of key specialist Dr. Lynn Burmeister in Victoria, saw Group revenue decline by -$12.3m over the fiscal period – proving to be an issue, which management admits will affect 1H19 performance.
However, looking towards FY19, the Company is anticipating NPAT growth that will be supported by new doctor arrivals and “strong momentum in South Australia, Ultrasound and KL”. On our numbers, MVF trades on 12.7x one year forward price to earnings and 5.0% dividend yield – reiterate long term Buy (though we note we expect some short term weakness)
- FY18 Key results – highlights: Over the pcp:
1. Group revenue fell -2.9% to $150.6m (versus prior year $155.2m), with Australian Patient Treatments down -9.4% (to 14,553) and International Patient Treatments up +24.2% (to 1,672).
2. Underlying EBITDA contracted by -22.2% (to $38.1m) following significant expenditure increases and a $1.2m one-off cost associated with executive recruitment.
3. Consequently, EBITDA margins fell to 25.3% (from 31.6% in FY17).
4. NPAT attributable to shareholders was down -27.9% to $21.4m (from $29.6m in FY17), consistent with management guidance that flagged a rough -25% drop.
5. The Dividend payout ratio came in at 65.9%, comfortably within the policy guidance range of 60 – 70% of NPAT.
6. A final fully franked dividend of 2.6cps was announced, bringing FY18 dividends to 6.0cps (compared to 8.8cps in FY17).
- Capital management. Net debt to equity remained stable at 56.4% (versus 56.3% in FY17), however we do note that MVF’s leverage is hovering considerably close to banking covenants at less that 3.5x (3.46x). Nevertheless, management appeared confident, stating “overall capital management metrics are comfortably compliant”, signalling some light of strength in improving NPAT growth in the outlook. MVF’s total syndicated long-term debt facility – a blend of 3, 4, and 5-year term debt – will see its first tranche expiring in 2020, so we expect a refinancing effort to come soon. Additionally, a fully franked final dividend of $0.026 was announced, bringing FY18 dividends to 6cps representing a payout ratio of 65.9% which sits comfortably within the dividend policy range of 60 – 70%.
- Outlook signals recovery and growth. Management are anticipating delivering NPAT growth in FY19, albeit flagging a likely contraction of -15% in 1H19 as a spill over from FY8. MVF continues to focus on its core competencies in premium fertility offerings, as well as looking for further international opportunities in the Asia Pacific. Management stated that their scope for strategy “absolutely includes inorganic growth”, an aspect that we see as being probable with MVF’s debt capacity certainly providing such headroom.
MVF FY18 RESULTS
Figure 2: MVF Results Summary
Group revenue – Australia continues to drag. MVF’s Group revenue was down -2.9%, attributable to the Australian business which saw its ARS market decline (-$1.9m) and a specialist departure (-$12.3m) hurt the top line significantly. Total IVF Patient Treatments fell -9.4% to 14,553, with significant contractions being noted in Cancelled Cycles (-17.8%) and Stimulated Cycles (-11.9%). On the analyst call, while management did detail the significance of Dr. Lynn Burmeister’s departure, they were quick to note solid long-term performance as well.
International. Despite remaining the smaller contributor to earnings (9.9% of Group EBITDA), the International segment remains MVF’s outperformer and key to a turnaround story. Overall international patient treatments were up an impressive +24.2%, with strong growth contributing from additional specialists in Malaysia, clinic expansion and incremental volumes. Pleasingly, EBITDA increased by +50.2% to $3.77m (from $2.51m), with margins also increasing to 43.0% (from 40.3%) as additional volumes helped leverage the segment’s cost base.
Operating expenditure increases. MVF’s Group cost base increased significantly to $112.5m (from $106.3m) over the period, contributing to EBITDA margin contraction to 25.3% (from 31.6%). Significant expense increases included; inflationary cost impact from Scientific Enterprise Agreement and property increases ($1.7m), Malaysian clinic expansion ($1.3m), and one-off costs associated with executive recruitment, legal cases and restructuring activities ($1.2m).
Figure 3: FY18 Revenue Analysis
Dr. Lynn Burmeister’s departure was a significant drag on MVF’s revenue over the period, with associated patient referrals dropping as a result. Management note that they were able to retain 1-in-3 of Dr. Burmeister’s patients initially, however this number has dropped (1-in-5) in more recent times as the specialist gained momentum and started operating in the Victorian market. While this was a top concern for many of the analysts on the conference call, management reiterated their priority on expanding the overall market in Victoria, rather than spending effort trying to recuperate these lost patients. MVF’s key strategy here is their premium product offering (high intervention), which management detail is more profitable and sustainable.
Figure 4: IVF Treatment Numbers Breakdown + Non-IVF treatment numbers
Figure 5: MVF Financial Summary
Source: BTIG, Company, Bloomberg
Monash IVF Group Ltd (MVF) offers assisted reproductive technology services, ultrasound services, gynaecological services, in-vitro fertilisation services, consultancy services and general clinical services to patients in Australia and Malaysia. MVF comprises 40 clinics and ultrasound practices and employs ~100 doctors and has a network of 650 associated health professionals.