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Added 4 months ago
#UBS initiates coverage

UBS has initiated coverage on Promedicus with a 12-month target of $24.30.

Interestingly, this valuation assumes ~$47m in revenue for FY2019 and ~25% average annual revenue growth through to FY2023.

Said another way, PME is *presently* trading on 23x FY2023 sales!

UBS is forecasting FY2023 EPS of ~50c. So shares are *presently* on 52 times the earnings that are 4 years away! That means that even if PME hits this target, and shares are commanding a PE of 50 in another 4 years, shareholders stand to see no return (aside from a few dividends)

It all seems rather bold, but there is legitimately some very big longer term value. In the parlance of analysts, there is a significant terminal value. (Which is just a way of saying that most of the value is due to longer term earnings. Think Amazon)

UBS notes that PME has ~6% of the global enterpirse imaging market, which is presently worth around US$560m. PME is winning a majority of tenders and the industry itself is growing. Further, there are plenty of other areas, such as AI, and other "ologies", that the tech can potentially be applied to.

I wonder how much their valuation was predicated on conforming to the market's value. It's surprisingly common in the industry (who is bold enough to offer a valuation that is 40% below the market value and the consensus of industry peers? Better to be collectively wrong than risk looking individually silly).

Last edited 2 months ago
#HY2019 Results


Yet another set of exceptionally strong results.

Revenue for the 6 months to Dec 31, 2018 rose 59.4% to $25.3m. Due to a relatively fixed cost base, this resulted in a 79.9% jump in underlying net profit which came in at $9.2m and saw operating margin improve to 51.8% (compared to 48.5% at the end of FY18). CEO Sam Hupert said he expected margins to further increase as the business scales.

(The statutory gain was 184%, but this includes currency changes, differences in accounting treatment and a deferred tax adjustment).

Importantly, transaction volumes continued to grow -- demonstrating not only the value of their product to customers, but allowing for further optimism in the value of contracts (which are priced at only a base level of transaction volumes).

With zero debt, $24.7m in cash and massive amounts of free cash flow, the business was able to not only lift the interim dividend by 40%, but also declare a 2.5c special dividend. Both are fully franked and given potential upcoming changes to the imputation system, this is a very prudent and shareholder friendly move.

All jurisdictions saw double digit growth, and the sales pipeline remains very strong.


Last edited 5 months ago
#Morgan's initiates coverage

I wont re-post the report from Morgans Stock-broking here out of respect for their IP.

But they have made some very strong growth assumptions. Even on their forecast numbers and target price ($23.69), they're valuing PME at ~33x FY2021 sales, or 71x FY2021 earnings. 

If anything justifies the price, it's the expectation for them to grow from 4% to 29% market shares by 2028, sustaining a CAGR in revenue of ~26% for the next decade and delivering an impressive 83% operating margin. That's not impossible, but 10 years is a long time -- especially in tech, and especially with loads of extremely well funded and capable players in the industry. 

So the questions are:

Does PME have a strong enough moat to defend such impressive margins over such an extended period of time? And, can it maintain sufficient technological and service superiority to continue to steal such significant market share over the coming decade?

Even then, if all of the assumptions from Morgans prove accurate, PME will need to attract a PE of at least 25 at maturity to deliver investors a 10% average annual return. A PE of 40 in 2028 is needed for a 15% average annual return. (excluding dividends)

That's certainly not impossible, especially for a company that has delivered such heady growth and commands an extremely strong industry position.

I'd certainly be super happy to generate a 10-15% annual return over the coming decade!

What concerns me is the asymmetry in the proposition. I find it hard to justify forecasting even stronger growth, better margins and higher terminal multiples.

But you don't have to reduce any of Morgan's assumptions by much to get a very different picture. EG. Say PME 'only' achieves average annual sales growth of 22% through to 2028, and an EBITDA margin of 80% (compared to their assumptions for 26% & 83%, respectively), then profit is ~30% lower than their forecast in 2028. At a PE of 25, shareholders can expect an average annual capital gain of ~5% over the coming decade.

To be clear, PME is a significant position for me personally. I have a high level of confidence in it's future. Even under far more conservative assumptions, I think it's unlikely shareholders will lose money from here (over the long-term -- could easily fall a lot in the short-medium term). But to get the kind of returns i'm hoping for, I need to see a lot of things go very right for a long period of time. If PME comes in short on any of these fronts, I'm looking at extremely low risk adjusted returns.

I've always said it's dangerous to overthink valuations for high-quality, fast growing businesses with long runways. And, by extending my view beyond the next few years I've been able to justify increasing my valuation (significantly).

But I'm finding it harder and harder to justify my current weighting. I'll likely be reducing my position (again) soon...

Added 2 months ago
#FY2019 Results

Well, another incredible result. Let me count the ways:

Revenue up 47.9% to $50.1m

NPAT up 91.9% to $19.1m (you gotta love operating leverage!)

Margins continued to increase -- EBIT margins now at 51.6%

A huge wad of cash on hand $32.3m, with no debt

Dividends increased by 75%

The only question here is one of value. Shares are on a PE of 167, or a PS of ~64. Crazy in so many ways, but then again, a few more years of this kind of growth will bring these back very quickly. And experience has taught me it's better to overpay for a quality company, then get a bargain on a poor one.

Results announcement here


Last edited 7 months ago

Interview of Sam Hubert by Lakehouse Capital here

Added 6 months ago

Pro Medicus remains a high quality stock. Recently, people have been concerned about the share price, as it is considered very expensive compared to valuations. However, I believe PME is an excellent example of a company we should be willing to pay a premium price for, considering that it’s a quality business. Taking profits as the share price increases, but will not be selling out completely by any means. Look for dips in share price, or even major falls, for entry into this quality business.

Last edited 7 months ago
#Media Articles

An article from the AFR, dated August 24, 2018


Last edited 7 months ago

Anthony Barry Hall, Executive Director Co-founder of Pro Medicus Limited in 1983, Anthony Hall has been principal architect and developer of the core software systems. His current focus is the transition to and development of the company’s next generation RIS systems 29.1m shares - the second largest shareholder with 29.29% of the company Salary $340k

Last edited 7 months ago

Sam Hupert -- Managing director and CEO 29.1m shares -- the largest single shareholder, with 29% of the company Salary $465k Co-founded the business in 1983 with Anothony Hall, the other major shareholder