Investment Thesis
- Currently under takeover activity, with an offer from CapVest Partners for $7.60 per share.
- The Aging 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.
- Potential accretive acquisitions domestically and internationally. Domestic acquisition of other laboratories will consolidate VRT geographic expansion strategy along the eastern seaboard of Australia.
- Earnings increasingly become diversified as international segments are expected to become a larger contributor.
- Solid balance sheet with flexibility to execute expansion strategies.
- Market-leading position with ~40% of domestic market share.
Key Risks
- Current takeover activity does not lead to a transaction.
- Regulatory risk as changes in government funding may increase patient’s out-of pocket expenses and thereby decrease volume demand.
- Fluctuations in the availability and size of Medicare rebates may negatively influence the number of IVF cycles administered and overall industry revenue.
- Weakening cycle activity continues to adversely impact revenues.
- Increased competition from low-cost providers.
- Weakening economic activity resulting in increased unemployment leading to less disposable income to be spent in IVF treatment.
- Execution of international forays goes poorly.
Key Highlights: Relative to the pcp and on a constant currency basis:
- Revenue increased +1% to $171.3m, however, EBITDA and NPAT declined -36% and -50% to $37.9m and $15.2m, respectively, primarily due to higher operating expenses, margin erosion from cancelled/deferred cycles during the period and pcp including $7.7m of Covid-19 related Government assistance and a fair value gain of $1.6m on a contingent consideration vs $2.6m of M&A transaction costs in current period.
- Net debt declined -19% over 2H21 to $76.5m, leading to leverage improving to 1.3x.
- The Board declared a fully franked interim dividend of 12cps, representing a payout ratio of ~65%. However, the Board expects a 2H22 dividend to be based on a full year dividend range of 45-55% to enhance balance sheet flexibility for investment in organic and inorganic growth initiatives.
- Australia revenue increased +1.8% driven by fresh IVF cycles growth of +1.3%. Premium service volumes (~80-85% of revenue) increased +1.2% with growth in all regions, The Fertility Centre (TFC) volumes (~15-20% of revenue) increased +1.7% (remained severely disrupted by the prolonged lockdowns), Fertility diagnostic revenue increased +8.5% amid growth of Preimplantation Genetic Testing (PGT) activity, and Day Hospitals revenue increased +4.3% amid improvement in demand for non-IVF procedures, which now account for ~50% revenue. Segment EBITDA declined -21% amid higher employee costs reflecting expansion of the workforce and Covid-19 related cancelled/deferred cycles.
- International revenue declined -2% and EBITDA declined – 19% with Singapore down -18% (fresh cycle volumes down -16.3%), Denmark down -24% (fresh cycle volumes down -8.4%), Ireland down -14% (fresh cycle volumes increase of +0.8% more than offset by preconception genetic screening roll out delays and constraints on egg donation program) and U.K. down -11%.
Company Description
Virtus Health Ltd (ASX: VRT) is a global provider of assisted reproductive services. The group’s main activity is providing patients with Assisted Reproductive Services such as specialized diagnostics, fertility clinics and day hospital services. It has 116 fertility specialists who are supported by over 1100 professional staff and is the largest network and provider of fertility services in Australia and Ireland, with a growing presence in Singapore. Virtus is one of three major players which collectively control more than 80% of market share and was the first infertility treatment company in the world to float on the stock market.
DISCLAIMER for General Advice: (This document is for general advice only).
This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.
The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require. The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.
The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.
Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.
Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents. Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material. Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.
The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.