I may be the latest person to the PME party in existence, but I’ve decided to take a bit of a look at it. I have little intention of buying it but I think there could be a lot to learn from its story about what to look for in searching for 100 plus baggers. One of my main questions, given the traditional view that “your margin is my opportunity” is how does PME sustain a 90% plus gross profit margin, which place it amongst the very best companies in the world on this measure. I know it’s well managed but this alone doesn’t explain it. I’m thinking their performance is more likely a result of their ability to capitalise on an inherent aspect of their industry, which therefore lends itself to a Porter’s 5 forces industry analysis. I’ll be working through this in coming days. More to come.

During this week's Strawman Meeting, we discussed valuations and taking a long term view as an edge in long term investing.

And, lo and behold, once again I am confronted with the worst investing decision in my life - that of doing some "analysis" on $PME in mid-2023 and concluding that at $70, it was too expensive.

And so, today it announces another monster contract ($300m for 10 years) and to stop myself feeling terrible, I've done a quick update. By the way, on that news the SP jumps $2bn! (As an analyst, when I'm feeling glum I do some analysis - it makes me feel better!)

So the structure of this analysis is as follows:

1) Quick DCF

2) Quick market analysis

3) Conclusion and discussion

1) Quick DCF

So, having looked at the accounts over the last 3-4 years, i've decided to run out a DCF for 20 years. It's pretty easy to model.

First 10 years, revenue CAGR 27%; Opex CAGR 20%

Next 10 years, revenue CAGR 15%; Opex CAGR 10%

Common assumptions:

• Ongoing capex at 5% of revenue (assuming they both update and extend the platform to take over more and more of the total available market of medical imaging software)
• Depreciate 34% of relevant LT assets pa (PPE, Intangibles, Leases)
• SOI growth at 0.15% p.a.
• Tax: 30%
• Cashflow growth beyond the explicit period 5% (note: you usually don't run more than 4%)
• WACC = 9%
• 100% equity funding (no debt) + a sensitivity with LT Debt:EBITDA = 0.5

Valuation $200/share

Of course, you can bump this up a bit if you add a little gearing to the balance sheet. If I add 50% of EBITDA as long term debt, I then get:

Valuation $218/share

As ever, you can get all sorts of valuations by tweaking the parameters, and I have omitted a few things (like deferred taxes etc. and adjusting the WACC in the leverage case). Playing with this model, I can get valuations down as low as $160 and up north of $230,but that's not the point of this thread. That comes next.

2) The Market

I'm reasonably confident that the global market for medical imaging software can be estimated to be in the ball park of A$5.6bn (fairly wide range of sources around this, but it's in the ball park).

Now $PME is not playing in this total market, but for the sake of this analysis (just like with $WTC), let's assume that over time it expands from its current focus to dominate the wider market.

So, today its market share is only 7%. Lot's of running room.

We know this market is growing at 7-8% per annum, and if I assume that for the next decade it grows at 8% pa, and thereafter at a more modest but still healthy 5%pa, then in 2045 the global market has become $18bn.

In 2045, with my DCF assumptions, $PME's market share has become 46%.

Now that would be a truly dominant market share when you look at how fragmented the market is today and some of the big names playing. (GE Healthcare, Siemens, Agfa-Gevaert, Hologic, Pie Medical, AQUILAB, MIM Software, Merge Healtcare, ScienceSoft, Acuo Tech. to name the big players) Most a equipment makers who develop their own software to use witht he equipment, with overlapping functionality for $PME. So that's a big source of $PME's competitive advantage, as its machine-maker agnostic.

Just to be clear, my market size analysis is for SOFTWARE only. Not the hardware. The global hardware market is worth north of A$70bn.

3) My Conclusion

These are just quick, rough calculations you can do in a few minutes. They're broadbrush. They are almost certainly wrong.

BUT, I just have to believe too much to have a conviction that $PME represents a good investment at $228, let alone $248,

There are too many other established players investing to compete for me to believe that $PME will eventually own some 50% of the total addressible market. It's a long bow to draw. Of course, if you are prepared to believe that, then equally, the analysis shows the valuations are justified for the long term. Afterall, maybe they do become the Windows of Medical Imaging! In software, there are precendents, e.g., Google for search.

I would consider investing today in $PME around $120-$150. I'd have to do a deeper dive to find my entry point, but that's a ballpark based on what I've done in 30 minutes. (My CommSec alert is at $170 ... don't think it will triggered any time soon.)

I don't believe today's news of a $300m, 10-year contract warrants a SP movement of +$2bn. These are the kinds of deals $PME MUST bring in, if it is to justify any valuation north of $150. Of course, the SP move could be rational if the market is efficienctly assessing this deal as increasing the chances of success that $PME is going to eventually dominate this market.

So, there you go. Let's see how well this post ages. And above all, do your own research!

Well done to all you have invested in $PME - my hat off to you, and this post shows how analysis can get in the way of being a great investor. But I am going to stick to my process - it serves me well more often than it lets me down.

Reflection

As a personal anecdote, a friend of a StrawPerson at last week's Brisbane drinks had just bought their first ASX shares. $PME at the recommendation of a friend at (I recall) about $217. As I drove home in my Uber after the drinks, I wondered what the conversation would be in a year's time. It didn't cross my mind they'd be up 14% in one week!

Disc: Not held, never have. ;-(

Another anouncemnt today sees the price up a further 21% at time of writin,

PME signs AUD $330M, 10-year contract with Trinity Health 28 November 2024 HIGHLIGHTS

PME signs AUD $330M, 10-year deal with Trinity Healt

Visage to replace multiple legacy PACS throughout the Trinity Health enterprise

Contract is for “full stack” - Visage 7 Viewer, Visage 7 Open Archive and Visage 7 Workflow

Visage 7 platform to be implemented in the cloud

Continues PME’s rapid expansion into North American integrated delivery networks (IDN)

Transaction-based model with potential upside

WOW...

Discc small holder icreasing by the second

A compounder here Ladies & Gentlemen>

CHAIRMAN’S REPORT (some of the Presentation below)

PRO MEDICUS LIMITED (ASX:PME) - Ann: AGM 2024 - Presentation, page-1 - HotCopper | ASX Share Prices, Stock Market & Share Trading Forum

During the FY24 year the company announced 9 new contract wins in North America including our largest contract to date, Baylor Scott & White, which as of mid- September is fully live, along with many others implemented during the year. (Dr. Hupert will go through the details of these contracts in his presentation). Since 1 July 2024 the Company has announced two significant client renewals, one in North America and one in Australia, both at increased fee levels. Despite the number of new additions to our client base, new opportunities continue to present themselves and as a result our pipeline remains strong

Financial Results FY2024 was another record year for the company with revenue increasing by 29.3% to $161.5 million and net profit after tax increasing by 36.5% to $82.8 million. The Company continued to be cash flow positive with retained cash and liquid investments increasing from $121.5 million to $155.4 million, after a $A2.77m buyback of shares in February/March, a $US5m investment in cardiac CT AI company Elucid and paying increased dividends. The Board anticipates FY25 will be another strong year. The budget for the current financial year has been determined recognising anticipated continuing strong growth, from both existing and new clients. I am pleased to advise that results to date are ahead of budget on a constant currency basis and an Australian dollar basis, despite some volatility in currency markets during the period. We anticipate that the second half of the financial year will be stronger than the first half, as is traditionally the case. 

Whome are they?

A look back to the June 2024 Annual Report:

Annual-Report-2024.pdf

>> I Just clarifying the employee head count its '120' worldwide <<

PME ASX: Pro Medicus’ Sam Hupert says simplicity secret of success

Hupert’s message to investors this week was one of “steady as she goes”. There are no plans to raise capital, make major acquisitions or veer away from the model that has been working for the past 10 years. “We have been able to fund growth organically and profitably. Touch wood, it has gone well for us. We didn’t imagine we would be quite here,” he says.

For a company worth $18 billion, its staff numbers are extraordinarily low at 120. It is headquartered in Melbourne, has an office in San Diego and an R&D centre in Berlin. The two inventors of its cloud software platform work for the company as chief technology officer and the head of development.

Eye watering return there below:

Return (inc div)   1yr: 158.49%   3yr: 54.37% pa   5yr: 54.44% pa

PME off about 11% on the back of a pretty strong result, market expecting more. Might have a nibble as I don't own with a bit bit of profit from ALU (owned since January 2015)

In todays AFR

Pro Medicus duo in $176m selldown; UCP nabs trade

Listed healthcare imaging software business Pro Medicus’ two founders began selling down $176 million worth of stock on-market just before midday yesterday, after a strong run in the company’s share price.

Fund manager sources said Anthony Hall and Sam Hupert had stockbroker Unified Capital Partners seeking buyers for 2 million shares at $88 apiece. That’s the same price as Pro Medicus’ close yesterday.

The trade was worth just under 2 per cent of the company and went to existing long-term shareholders.

Prior to the trade, Hall and Hupert had owned 25 per cent each of Pro Medicus’ total shares on issue. They are trimming their positions after a 62 per cent rally in the share price so far this year.

The duo floated the company in 2000, when it was making just $9 million revenue and had been around for 17 years. They held on to 40 per cent of the business each after the IPO and have been judicious with selling down in the 23 years since.

For the 2023 financial year, Pro Medicus posted $124.9 million revenue (up 33 per cent) and $60.5 million aftertax profit, which was 36.5 per cent higher. It had a $9.2 billion market capitalisation and has benefited from contract wins.

In the 2023 financial year, it won or renewed multiyear contracts with University of Florida and University of Washington; US non-profit healthcare providers Gundersen Health System, Samaritan Health and Luminis Health; and Montage Health Children’s Hospital of Philadelphia and Bay Imaging Consultants.

Hall and Hupert’s leftover shares – about 24 per cent each – are worth $2.2 billion for each co-founder with the way the stock is trading.

18-Aug-2021:  Excellent result from PME today, which resulted in their shares closing up +15.66% @ $65.35/share, another highest-ever-closing-price - they've been setting those on a reasonably regular basis during 2021.

To watch their CEO & MD, Dr. Sam Hupert, being interviewed about the result on Ausbiz this afternoon, use the following link:  https://www.ausbiz.com.au/media/pro-medicus-ceo-on-why-fy21-was-only-the-foundation-for-better-results?videoId=13707

He's pretty bullish on the future, and discusses the tailwinds that the company currently enjoys.

There was also an interview posted as an announcement to the ASX today - for further details on that, see here:  http://www.promed.com.au/dr-sam-hupert-interview-2/

Transcript of that interview here:  http://www.promed.com.au/wp-content/uploads/2021/08/CEO-Interview-FY-Results-2021.pdf

Results details can be viewed here:

http://www.promed.com.au/pro-medicus-limited-full-year-results-5/

Company announcement of results:  http://www.promed.com.au/wp-content/uploads/2021/08/Company-Announcement-Full-Year-Results-2020-21.pdf

HIGHLIGHTS

• Revenue $67.9m – up 19.5%
• Underlying profit before tax $42.6m – up 41.0%
• Net profit $30.9m – up 33.7%
• Cash and other financial assets $61.8m – up 42.4%
• Company remains debt-free
• Fully-franked final dividend 8c per share (total for the year 15c per share)
• Record number of new contracts announced during the period
• First FDA approved AI algorithm

Disclosure:  I hold PME in my SM virtual portfolio, but not in RL unfortunately.  Clearly I was wrong thinking they looked expensive in prior months and that I might get the chance to buy them cheaper.  This is one fluffy dog I am only going to be patting virtually it would seem, rather than in RL. 

Que sera, sera.

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

Some big insider buys on market announced today (Anthony 41,00 shares and Sam 30,00 all above market price) have finally encouraged me to take a position, knowing that 1. Yes general sentiment in the market could likely bring this down further and 2. The current valuation (even after this huge sell off) is still on the high side. In the short term, new contracts might slow down and we all wait to hear of any news regarding the impact of the pandemic.

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.