Monash IVF’s share price has more than doubled over the past year, and it’s easy to see why. This time last year, the market for assisted reproductive services was stumbling, organic growth was slow and the company had a monster-sized staffing issue – two senior embryologists quit, causing a third of Monash’s fertility specialists to write to management in protest. All seems to have been forgotten.
Revenue increased 25% to $156m for the year to June and, even after excluding acquisitions, organic growth was a very hearty 11%. In Australia, the number of IVF cycles increased 12% to 10,282, which was slightly ahead of the industry, causing Monash’s market share to increase from 22.8% to 23.8%.
ARS market returns to growth
Monash increased market share
FCF up 20%, net debt down
Internationally, the company’s small Malaysian business performed well with a 10% increase in cycles due to the addition of new doctors and a 33% increase in frozen embryo transfers. Revenue rose 11% to $6.2m.
The company’s imaging division tripled ultrasound scan volumes thanks to last year’s acquisition of Sydney Ultrasound For Women (SUFW). Specialised women's imaging services now account for 16% of total revenue, which is a nice diversifier. It was also good to see Monash’s genetic screening and diagnostic tests had a 74% increase in volumes (aided by lower prices).
IVF prices rise
Echoing larger competitor Virtus Health's result, it was pleasing to hear that the company was able to increase prices for its premium service clinics. This is significant because it suggests that the company is experiencing little pressure on prices, despite Primary Health Care entering the IVF market with low-cost, bulk-billing clinics in 2014. However, a larger portion of revenue coming from Monash’s low-cost service – BUMP IVF – led to average revenue per patient being flat.
|Year to June||2016||2015|| /(–)
|Net Profit ($m)||29||21||35|
|Final dividend||4.5 cents (up 21%),
fully franked, ex date 6 Sept
Overall, earnings before interest and tax (EBIT) increased 45% to $45m due to costs growing more slowly than revenue, while net profit was up 35% to $29m. One of the things we love about Monash and Virtus is that they are both highly cash generative business because clients are required to pay upfront before the company has to shell out on tests, drugs and staff expenses. Monash’s free cash flow grew 20% to $36m and we were pleased to see that some of that cash went to reducing net debt from $97m to $86m.
Management didn’t provide specific earnings guidance but said that Monash ‘is well positioned to continue to grow revenues and earnings in 2017’ due to the current strong demand for IVF. The stock has risen 44% since our initial upgrade in Virtus and Monash IVF claim to deliver from 8 Sep 14 (Buy – $1.67) and trades on a price-earnings ratio of 20 and a free cash flow yield of 6%.
With decent growth prospects, economies of scale and an improving balance sheet, there’s plenty to like about Monash. However, the rapid rise in share price may mean that the stock has become a large portion of your portfolio and, if that’s the case, we recommend reducing your holding to maintain a maximum portfolio weighting of 3% (or slightly less if you also own Virtus). Other than that, we’re increasing the price guide and continue to recommend you HOLD.
Note: The Intelligent Investor Growth and Equity Income portfolios own shares in Monash IVF. You can find out about investing directly in Intelligent Investor and InvestSMART portfolios by clicking here.
Disclosure: The author owns shares in Monash IVF.