Yet another spectacular set of numbers from one of the best businesses on the ASX.

I know you shouldn't be fussy with price when it comes to great companies, but Pro Medicus is on a PE of 127..

That could represent value, but you'd need to see at least something like 25% average annual compound growth in NPAT for 10 years, and for shares to then trade at a PE of 35 in 2033. If that happened, you get a 10% average annual capital gain.

Over the last 5 years, the CAGR in EPS has been about 35%. So if you extrapolate that forward and apply a terminal PE of 35 (about what CSL trades on), then your average annual capital gain is something like 18%pa over 10 years. On these assumptions, the company would have a NPAT of $1.2b in 10 years -- and that's perhaps not too much of a stretch, especially with expansion into other areas.

So I'm not saying shares are definitely too expensive, just that a lot of optimism is built in..

(An I'm just bitter having sold down so much over the years. Idiot!)

Another day, another sizeable multi-year contract.

ASX announcement here: https://announcements.asx.com.au/asxpdf/20230516/pdf/05pqzwn2073wvg.pdf

Essentially, US$20m over 7 years (with usual upside due to transaction volumes)

This is the 4th major contract win in the last 5 months.

I still hold a small number of shares, but as much as I love the company, I still struggle with the price tag -- something like 50x forward sales.

Yet another record half.

All the details are here, but some highlights include:

• Revenue up 28% to $56.9m
• NPAT up 30% to $27.2m
• Cash up 4.4% to $94.5m
• 3 major contract wins for the half.

This is the strongest half year in the company's (already impressive) history.

The company has grown its top line from $14m in 2014 to well over >$100m for FY23 (pro-rata basis). But what's truly amazing is that they have done this:

• Without raising capital, and an essentially flat share count
• Sustaining insane NET margins (now at around 50%!!)
• Paying out dividends! (divs per share are up 10x since 2014)
• Gushing cash
• Sustaining growth investments

It's a masterclass in capital management, and how structural disruption and network effects can combine to deliver incredible and long-last growth.

The only problem? My estimate for the PE on a forward basis is somewhere around 120x. I've said many times before you shouldn't overthink valuation for high quality, fast growing businesses, but still...

I retain a very small position.

Yet another contract win for ProMedicus. This time, a $28m / 7 year deal with Allina Health.

Details here but essentially a copy and paste of all their deals. And they are winning lots.

There's nothing not to like about this business...except the price.

At 50x sales or 100x earnings -- on a forward basis -- it's just hard to wrap your head around.

Another big contract win for ProMedicus, this time signing US-based Novant Health for a 7-year, $40m contract. (~$5.7m pa)

As the company has pointed out, this is the 7th major US contract in the last 18 months.

Over the last year they've signed deals worth >$160m, typcially for 5-8 year periods -- let's call that an additional $25m per year, for a company that last year had $67m in sales. This is high margin revenue, most of which drops to the bottom line. (this is why operating margins have been growing so fast -- the fixed cost base is scaling extremely well)

The sales momentum is very strong and the company seems to enjoy a very high win rate. The team is well practiced at integrations and tends to have new customers up and running within months of signing. 

Best of all, once established, there's virtually no churn, little customer-specific costs and inbuilt revenue flex due to the transactional based nature of their contracts.

I think both scale and network advantages will continue to build too.

I love this company... just not the price. I know I shouldn't overthink value too much when it comes to such extreme quality and growth potential (which is why i still retain a small holding), but at ~85x sales it's hard to give it too much weighting in the portfolio.

Another very solid result for PreMedicus.

For the FY21 year revenue was 19.5% stronger to just shy of $68m, with net profit up more than 33% to $30.9m as the business continues to scale well.

The top line has grown at an average pace of almost 20%pa for the last 5 years, while NPAT has grown at a stunning 37% per year (on average). Net margins are not only incredibly high, but have steadily improved (see attached chart) -- NPAT *NET* margin now sits at 46%.

It would have been much stronger than this if it werent for FX movements (revenue and NPAT would have been up 30% and 56%, respectively).

Not only that, but all this growth has been entirely self funded, with no new share issues being issued, or virtually any debt, over the last decade. In fact, PME has over $60m in cash at the bank.

It's even paid a consistent and fast growing dividend along the way. For FY21 it'll pay 15c per share all up, 5x more than it did in FY16.

A record number of new contracts were secured over the period, and the sales pipeline remains very "healthy" according to CEO Sam Hupert.

The Research collaboration agreements with with the Mayo Clinic and NYU Langone Health have yieled an FDA approved AI algo for breast density screening, and there's good growth potential there.

I regard this as one of the best businesses on the ASX. The only issue is price, which is rather "full"

On the latest numbers, shares are trading on a Price to Sales of 86 and a PE of 190.

I've had some very serious regret being too fussy on price in the past, but i'm not tempted to buy any more at these levels.

That being said, given the economics and growth runway, shares could be considered 'fair'. EG. assume 30% NPAT growth for 10 years and assume the business trades on a PE of 35 at that time, and you get a FY31 share price of  ~$140. Discount that back by 10%pa to today and you get a valuation of $54 -- roughly where it sits now.

The only trouble here is that even if things go extraordinarily well (30% CAGR in net profit for a decade!), you get a market average rate of return. Anything short of that and you'd get an underperformance. So the phrase priced for perfection seems apt.

Of course, perhaps PME exceeds even this. But I find it prudent not to assume such lofty targets -- "margin of safety" being the other phrase that comes tro mind.

Results announcement here

This new contract win is BIG, and comes only a month after the record $40m contract with Intermountain was announced.

Signed with 5 academic health systems, the 7-year deal is valued at AUD$31m, with further upside afforded by the transaction model and the option for affiliates to standardise on Visage platform (which seems very likely to me, at least to some extent).

Visage 7 will be implemented across 5 diagnostic imaging departments, the first time the entire imaging diagnostic system will be unified on a single platform.

PME has won 6 out of 6 major contracts in their industry in the last 7 months. All of which were competitive tenders. This is a very strong validation of the offering.

What a fantastic company. The hard part is the valuation, which seems rather rich despite the pace of growth and available market opportunity.

ProMedicus has received FDA clearance for its AI breast density alogrithm, following approval from European and Australian regulators.

This was developed in-house using PME's AI Accelerator platform -- something that greatly speeds up algorithm development, and will provide a platform for 3rd parties to leverage PME's tech (and provide additional use-case and revenue in the future).

AI gets a lot of hype, but medical images are perfectly suited for this tech and one of the main areas of development. PME's visage product is perfectly suited for this, and another strong plank in the value proposition for potential customers.

This announcement doesnt change the earnings outlook for me (i'd already baked in potential for AI), but is a noteworthy milestone.

Promedicus has signed a 5 year contract with Maryland/Columbia health system MedStar Health to replace their legacy PACS across 10 hospitals. It will involve the full suite of visage 7 modules.

The deal is worth A$18m, and is the usual transaction based model (which provides for further upside).

Aside from the size of the deal, it's also notable in that it was won through a competitive tender process, which validated the benefits of PME's cloud based system. It will also act as another important reference site for the all important US market.

ASX announcement is here and you can read an interview with CEO Sam Hupert here.

Promedicus has announced a 7 year contract win with LMU Klinikum, a large university teaching hospital in Germany.

The contract will be worth $10m over the period. It's a material win, but perhaps not as significant as yesterday's 7%+ share price jump would suggest. 

Beyond the immediate financial value of the deal, it's great to see PME able to penetrate this market, which the CEO says has been very difficult. And it's also an important reference site with LMU being a "thought leader" in this field, and training the next geneartion of specialists.

You can read the full announcement here 

[disc: held]

ProMedicus has announced a material win, signing a $22m 5yr contract with Northwestern Memorial Healthcare for its Visage 7 product.

This will be based on the usual transaction based licensing model, which provides further upside if usage exceeds a set minimum.

This is the biggest individual contract signed since the Partners Health deal in late 2018. 

You can read the ASX announcement for the new contract win here, and an interview with CEO Sam Hupert here.

Yet another cracker.

Revenue up 15.7% despite a large one-off capital sale in the prior half. Margins improved, with net profit up 32% (go operating leverage!)

Operating cash flow jumped strongly, as did the cash balance -- which sits at almost $39m. The company still has no debt.

Implementations are being completed ahead of schedule and without any major issues, and there is plenty of capacity to onboard new customers. 

Sales pipeline is as strong as ever, and the company is getting an increased network and 'social proof' effect due to its high profile client list.

Some super exciting stuff happening in AI, which i've always thought has huge potential. PME is one of the rare ASX companies that can legitimately claim to have direct and high-potential exposure to this theme.

I'd encourage investors to read the Open Briefing interview -- although it's hardly a tough interview, there are some good insights.

I think PME is one of the best stocks on the ASX. The only challenge is one of price -- there's a heck of a lot of optimism priced in. On a trailing 12 months bases, shares are presently on a Price to sales of 55x!! (based on share price of $28.97 at time of writing). The ttm PE is ~140

I previously sold down some of my position mid last year when the price was getting a bit silly, but retain a modest holding. Not looking to buy more anytime soon, but happy to leave existing shares in the bottom drawer -- the sheer degree of quality makes me far more relaxed on valuation than i would normally be.

Results announcement here

PME has signed a 5 year, $6m (minimum) contract with Nines -- a tele-radiology Palo Alto based software company led by silicon valley veteran David Stavans.

The contract will allow Nines to further develop radiology products based on ProMedicus' Visage 7 platform. Nines has a focus on Machine Learning and AI in developing its cloud based solution.

Seems a good deal that essentially gives PME an entirely new channel. Nines success will be PME's success.

Announcement here

Promoedicus will be showcasing its AI Accelerator solution and breat density classification algorithm at the upcoming Radiologiocal Society of North America in December. (ASX announcement here)

A key aspect of their solution is that it enables integration of 3rd party algorithms through an open API -- which means it has the potential to be the platform for research and application in this fast growing area. I remain convinced that medical images are a perfect candidate for AI processes, and will soon be integral to almost all future diagnosis procedures.

With big name collaborators such as the American College of Radiology, and a fast growing list of industry leading customers, Promedicus is very well placed here.

This area of the business has potential to not only enhance the attractiveness of Promedicus' Visage system, but could open up a new customer set (researchers and developers) and build a potent network effect.

ProMedicus remains one of the most exciting businesses on the ASX, and I remain convinced that it will be a significantly bigger and more profitable company in the decade ahead.

The trouble is, that is well and truly being priced in by the market at present. I retain a modest holding, but am not looking to add at current levels. 

Pro Medicus provides medical software, most notably imaging software under the Visage brand.

In essence, the software allows the storage, transfer and viewing of extremely large medical scan files (such as those produced through MRI scans).

Although a relatively small Aussie company, it is the global leader in its field with many of the world’s most prestigious medical institutions as clients (Mayo Clinic, Yale New Haven Health, Mercy Health).

Contracts are in effect for many years (usually 6 years plus) with a specified minimum value and upside based on volume. As such, customers are very sticky and cash flows are quite reliable. The business is profitable, with zero debt, and a solid cash pile ($24.7m as of HY2019).

Sales are growing rapidly, there is a strong industry tailwind and there remains a huge global market opportunity. The company also pays a dividend! Operations are immently scalable, with net margins expected to materially improve as more clients are added.

Given the nature of the business, its clients and global span, it’s virtually recession proof.

Management are first rate, led by founders that have huge personal shareholdings and who draw modest salaries. The only consideration here is price, and you don’t want to be too fussy on this front. 

CEO said they were "comfortably ahead of budget" in terms of financial expectations for the current financial year, with expectations for a stronger second half, and a growing sales pipeline.

Spoke to the founder sell-down earlier in the year, which was supposedly ancouraged by the board to improve liquidity. This amounted to 7% of their shareholdings and they continue to hold 54% of the company.

Spoke to using the buy-back to help mitigate added volatility of the share price. Personally I think that is a silly reason. You only buy back shares when (a) you have no better investment opportunities and (b) shares are trading a material discount to managements estimate of fair value. At the current price, I find the second part difficult to reconcile. 

Promedicus also talked to their AI capabilities, announcing AI Accelerator which better enables AI developement on their platform. Medical images are perfect for AI, and I see this as an increasingly essential component of their offering.

Full AGM presentation is here 

Promedicus has signed a 5 year, $9 million contract with Ohio State University Wexler Medical Center (OSUWMC) for its Visage 7 imaging product to be implemented across all radiologoy deptartments.

As usual, the contract is transaction based (which allows for a set usage and then pay per use upside)

The implementation is due to complete in mid-2020.

You can read an Open Briefing interview with CEO Sam Hupert on the deal here

This is an important and significant win, but I wont be increasing my valuation which already assumed ongoing strong growth in sales.

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

Promedi-YEAH!

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.

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).

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...

An article from the AFR, dated August 24, 2018

LINK

Interview of Sam Hubert by Lakehouse Capital here

Article in weekend AFR (13th January 2018) -- click here

Key points:

• PME to move into other areas outside radiology (eg. cardiology & opthamology). They are smaller markets, but still significant and growing, and existing tech is well suited.
• Organisations want a single imaging solution
• Continuing investment into AI (which i belive is extremely well suited to medical images and has a big tailwind).
• Company expects AI & automation will be universally adopted within 3 years, and want to be well placed for that timeline