From the Financial Review magazine: Harrison.ai
May be of interest for those looking at the radiology diagnostic space, probably complementary for PME but not an area I have looked into in depth.
AFR Young Rich List 2024_ Aengus and Di...ralia’s most wealthy aged 40 and under.pdf
I don’t hold Pro Medicus (PME) and I don’t know the business well. I would like to own PME but I just can’t get my head around the current share price of $64.64 from a valuation perspective. Admittedly, I have only looked at PME based on the metrics and I haven’t gone any further into the business. So this is flawed to begin with. There might be something unique about PME that goes beyond the metrics that potential investors need to consider. I’m very happy for fellow Straw folk to to call me out on my assumptions or calculations.
There is no denying PME is a wonderful business when you look at the metrics. Earnings CAGR has been 31% for 5 years, and analysts are forecasting earnings growth of 20% for the next 5 years. The gross margin is 99.6% and net margin is 48%. Historical ROE was 44% and forecasts are for similar going forward. PME has no debt and $94 million in cash. This is the type of business every investor should own, but what can you afford to pay for PME so you can get a reasonable return on your investment?
Promedicus has total shareholder equity of $117 million and there are 104 million shares on issue. That means you get $1.13 worth of equity in PME for your $64.64, or about 57x book.
If PME could reinvest 77% of its earnings (currently 50%) at 44% per year for the next 10 years the book value would climb to $21 (compound interest at 34%) VISA (V: NYSE) has a similar ROE (40% to 50%) reinvests 77% of its earnings, and is currently trading on a PB of 12.8x. If you use the same PB multiple for PME as VISA, that would give you a valuation of $270 per share in 2033. A 4 bagger in 10 years plus dividends would make PME a great investment.
However, PME is currently reinvesting 50% (not 77% as VISA is) at 44% per year. There is a big difference. Over ten years the book value will climb to $8.25 per share (compound interest at 22% per year) Using the same PB multiple as VISA (12.8x) that would value PME at $106. There will also be increasing dividends along the way at about 0.5% per year.
If you assume these metrics for the next 10 years and a PB ratio of 12.8x that would give you a 5% to 6% return if you invested $64.64 now.
There are a number things that could change the valuation for PME going forward: higher ROE than 44%, higher reinvested earnings than 50%, and the market is prepared to pay a higher PB ratio than VISA (12.8x) in 10 years time. Currently the PB ratio for PME is 57.7x so a higher PB ratio is highly likely. However, how long will PME demand a premium when there are other business you can buy with similar performance metrics on a much lower PB ratio (eg. VISA)?
Hi @elpaso96 -- note that the on-market buy-back for ProMedicus, which permits them to buy back up to 10% of all shares on issue, won't necessarily be acted on. It's just a capital management option that management like to have open.
For example, they announced the same thing last year but actually bought zero shares back over the period (see second page of the latest announcement). I think this was sensible, as a buy-back really only makes sense when (a) there is no better use for the capital, and (b) shares are trading below their intrinsic value.
As such, I wouldn't rely on it to support the price. But agree it's a good option for management if they use it wisely.
Another great result from ProMedicus (PME).
FYI -- if you want to attend the results call at 11am 13/2/20 (AEDT), go to this link: https://services.choruscall.com.au/webcast/promedicus-200213.html