At first, we had no intention to review Monash IVF after it recently announced the resignation of a staff member. But a slightly bitter aftertaste has lingered and our suspicions have grown. So here we are.
Monash’s share price has fallen more than 10% in the 11 days since the company announced the resignation of Dr Lynn Burmeister. In the press release, management pointed to a non-compete agreement and said that it didn't expect a financial impact in the 2017 and 2018 financial years.
But then things got weird. Firstly, Dr Burmeister isn't an ordinary fertility specialist, she's Monash’s clinical director and oversees patient management – information that was surprisingly missing from the press release.
Clinical director resigns; strange wording
Large profit impact in 2019
Reducing price guide
Furthermore, the ASX announcement was marked as non-price sensitive, yet management said that ‘there is potential for a percentage decline in Net Profit After Tax (NPAT) of up to high single digits which may be offset by other market opportunities’ in the 2019 financial year. If nothing else, the share price reaction suggests this very much was a price-sensitive announcement.
And how does Dr Burmeister's resignation have no material impact in the year that she leaves, yet result in a high single digit profit cut more than a year and a half later?
Do not compete
Monash's specialists are generally paid a fixed fee per cycle and contracts typically have a non-compete agreement for 1–3 years within 50km of the clinic. We don’t know the details of Dr Burmeister’s contract, but given the timing of the profit impact it's reasonable to assume a non-compete clause of around a year.
What's more, there's typically a three to six month waiting period between a patient's registration and when they begin treatment. Dr Burmeister's notice period ends in September, so if we assume the non-compete clause ends in late 2018, that will probably mean little disruption to patient numbers until the second half of the 2019 financial year. That explains the delay. If Dr Burmeister then starts a competing practice in Victoria, it's a good bet the company will lose clients given her strong reputation.
Still, the profit impact in 2019 seems overblown. Monash has more than 100 fertility specialists. How can this one specialist account for such a disproportionate share of earnings? We asked chief financial officer Michael Knaap and he put it down to Dr Burmeister being the company's highest volume consultant. We'll take his word for it, but it's surprising nonetheless. We wonder whether a few other bits of debris are being swept under the rug using this announcement.
Dr Burmeister's resignation is also concerning in that it could indicate a growing clash between clinical staff and management. Two years ago, the company faced backlash from a third of its fertility specialists, who wrote a letter to the board of directors expressing concern over the resignation of two senior embryologists and a culture that could endanger patient care. Things seem to have settled since then but this announcement puts us on edge.
Then there’s the fact that chief executive James Thiedeman resigned last month after eight years in the job. The senior resignations – plus the large profit downgrade in 2019 – may suggest management sees trouble on the horizon.
Don't get us wrong, there’s still plenty to like about Monash. The IVF industry has roughly doubled over the past ten years and the growing tendency for women to postpone having children until later in life all but guarantees that demand for assisted reproductive services will increase over time – albeit in fits and starts due to its discretionary nature. Being the second-largest operator in the industry, Monash's economies of scale and strong brand mean it's well positioned to take advantage.
What's more, the stock trades on an undemanding price-earnings ratio of just 12 based on consensus estimates for 2017 earnings and a free cash flow yield of 6.7%. Management expects net profit to increase in the 2017 financial year compared to 2016, though it hasn't offered specific guidance.
Nonetheless, another senior resignation is unsettling. The strange, under-the-radar profit downgrade only adds to that. We don’t want to be caught upgrading too early so we’re lowering our price guide slightly to provide a wider margin of safety and note our recommended maximum portfolio weighting of 3%. HOLD.