Pro Medicus Limited

ASX:PME

Pro Medicus Limited

ASX:PME
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$102.96 (+0.9%)
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#19
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17
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Reports (11) My Report Forum Investors
Forum Topics PME PME Pro Medicus Ltd General Discussion
Rick
one year ago

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)?

37
Solvetheriddle
one year ago

@Rick without checking your numbers, they look correct. Assuming PME's competitive position is not compromised over the next few years, and with all these highly priced companies that is the big question, imo, my approach to highly priced stocks that i want to own is as follows. work out the growth rate over the next two years and the resultant PE the stock will be on at the end of 2 years. then i consider whether that PE is low enough to almost eliminate the risk of permanent capital loss. this is a subjective judgement and differs for each stock, largely based of the PE/ROE relationship and historic PE ranges. Often is is not, sometimes it is. I choose two years because, usually, there is a market dislocation in any two year period (could be big or small) that usually gives you an attractive entry point. the problem here is continuing to have the conviction at that point plus also there are usually many other options, which can be a focus challenge. could be wrong, but i have found it useful framework for LT quality bias stock investing.

17
nerdag
one year ago

@Rick, agree with your analysis. PME is priced for perfection and then some. In no way is it an asymmetric opportunity in your favour at the current price, but then, if it gets there, then well done to those who held with conviction.

16
Strawman
one year ago

$PME is easily one of the best companies on the ASX, and while I retain a small holding (admittedly for emotional reasons -- which is never a good idea..) I too can't get my head around the valuation.

Who knows -- given all the dramas on international markets, we may get a better price. I'd start to take a more serious look if ever it got around $40.

34
Rick
one year ago

I found it interesting reading back through the old posts in this forum, dating back to 5 years ago. Almost all the posts are about how expensive Pro Medicus is and how the share price can’t be justified. So here we are once again talking about how expensive Pro Medicus is and how it can’t be justified! :)

26
Seasoning
one year ago

yeah it's interesting looking at companies that people spend years saying they're too expensive that never seem to come down. PME is definitely one of those (at the moment).

16
Strawman
3 years ago

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.

20
Strawman
4 years ago

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

1
Strawman
4 years ago

Promedicus shares have dropped ~36% in the past 3 months. 

Now getting back to my fair value estimate (see my PME Report page) -- although that's built on some ambitious assumptions, and takes a 10 year view.

Having sold down a big part of my holdings at higher prices -- due entirely to valuation concerns (i think the business' outlook is as bright as ever) -- I'd love to get a chance to buy back in closer to ~$20.

Despite still having some shares, as a long-term holder I'm hoping the price will continue to drop!!   

1