MVF - Monash IVF Group

[johnpendles]

MVF-AU looks fair value on my DCF/SOTP valuation. It is trading materially cheap vs VRT-AU on a simple FY15 price-earnings multiple basis.

Overall conclusion is presently HOLD on a long horizon basis.

I think the market did not like the fact that they missed their earnings predictions from the prospectus. at the AGM they explained why this occurred, but the market is fickle and the board will need to earn the market's trust back.

looks like the market agreed with your above post. anything in particular happened in the last few days to cause the price jump?

 

[DeepState]

looks like the market agreed with your above post. anything in particular happened in the last few days to cause the price jump?

JCP came in with a substantial. Ladies and Gentlemen, the smart money is back. Shadow boxing.

Thanks for your assistance with this, John. Shall send you a copy of my analysis via PM.

 

[johnpendles]

No problem mate.

I should disclose that I am a shareholder. I do not want to be accused of "ramping".

May I ask, what do you mean by this:

Ladies and Gentlemen, the smart money is back. Shadow boxing.

 

[DeepState]

No problem mate.

I should disclose that I am a shareholder. I do not want to be accused of "ramping".

May I ask, what do you mean by this:

Literally...shadow boxing. What I do when I'm rather happy about a development. It takes rather a bit. Jab-step-jab-step-cross-uppercut, a few other muay-thai things, round-house high kick...knock-out. Crowd goes beserk.

Then I sit down again.

Wife: "yeah, but it can go down as well".

Would a simple, "that's good" be too much to ask? Sheesh. Tough audience.

VRT-AU popped a bit in sympathy but the dispersion in value is declining. I can't make sense of its breadth.

 

[johnpendles]

Literally...shadow boxing. What I do when I'm rather happy about a development. It takes rather a bit. Jab-step-jab-step-cross-uppercut, a few other muay-thai things, round-house high kick...knock-out. Crowd goes beserk.

Then I sit down again.

Wife: "yeah, but it can go down as well".

Would a simple, "that's good" be too much to ask? Sheesh. Tough audience.

VRT-AU popped a bit in sympathy but the dispersion in value is declining. I can't make sense of its breadth.

haha, i see what you mean now.

 

[DeepState]

Quick Take-outs:

+ Downgrade based on lower than forecast Assisted Repro cycles (ARS). Has every reason to rebound to historical norms unless infertile women have stopped wanting babies and/or men have stopped wanting to try put babies in them. I have no evidence of either.

+ Another explanation might be that ARS cycles are down because Fetal transfers (FET) are becoming so successful. Revenue per treatment is down because the mix of treatments is moving towards FET. Need to look into that. Management commentary from VRT-AU and MVF-AU makes no such statement, but they wouldn't.

+ Interesting that Propsectus measures looked primarily at revenue per ARS. Yet, in the HY release, more weight was placed on revenue per treatment. Not sure which is the best way to think of it.

+ Very large increase in Fetal transfers. Will result in a material increase in revenue per ARS cycle. This is a technological development which is unfolding.

+ They have termed out their debt via floating for fixed over half of the debt book. Reduces any concerns on debt sustainability. They have disclosed enough about their covenants to know what they are and how to calculate the main metrics. Thanks.

+ Competition from SA is dusted.

+ Diagnostics are doing well. They are the leader in the newest generation. VRT is in catch-up mode. This does affect ARS patient acquisitions.


Overall:

+ Pretty routine update with random pattern of movements to the downside on this occasion without any known reason why it would be a rebasing relative to an historical trend line.

+ Dividend is in-line.


Follow-up:

+ FET growth impact on ARS growth.


Other:

+ Not worth updating the valuation on present facts.

+ What is so magical about this $1.40 level that seems like a magnet to the share price??

 

[TPI]

Quick Take-outs:

+ Downgrade based on lower than forecast Assisted Repro cycles (ARS). Has every reason to rebound to historical norms unless infertile women have stopped wanting babies and/or men have stopped wanting to try put babies in them. I have no evidence of either.

+ Another explanation might be that ARS cycles are down because Fetal transfers (FET) are becoming so successful. Revenue per treatment is down because the mix of treatments is moving towards FET. Need to look into that. Management commentary from VRT-AU and MVF-AU makes no such statement, but they wouldn't.

+ Interesting that Propsectus measures looked primarily at revenue per ARS. Yet, in the HY release, more weight was placed on revenue per treatment. Not sure which is the best way to think of it.

+ Very large increase in Fetal transfers. Will result in a material increase in revenue per ARS cycle. This is a technological development which is unfolding.

+ They have termed out their debt via floating for fixed over half of the debt book. Reduces any concerns on debt sustainability. They have disclosed enough about their covenants to know what they are and how to calculate the main metrics. Thanks.

+ Competition from SA is dusted.

+ Diagnostics are doing well. They are the leader in the newest generation. VRT is in catch-up mode. This does affect ARS patient acquisitions.


Overall:

+ Pretty routine update with random pattern of movements to the downside on this occasion without any known reason why it would be a rebasing relative to an historical trend line.

+ Dividend is in-line.


Follow-up:

+ FET growth impact on ARS growth.


Other:

+ Not worth updating the valuation on present facts.

+ What is so magical about this $1.40 level that seems like a magnet to the share price??

DeepState,

Do you have any further thoughts on VRT as opposed to MVF?

Do you feel that MVF is a better play on this sector than VRT?

From my reading, VRT has the leading market share in Australia, with full service and low-cost clinics, the most fertility surgeons, as well as market leading positions in Ireland and a new clinic in Singapore, along with genetic diagnostic testing revenue and day hospital revenue (half of which are derived from non-IVF services). So wouldn't the market leading domestic position and perhaps more diversified earnings streams make this a better choice?

In terms of intrinsic value, my rough calculations suggest MVF is still under-valued, with VRT fairly valued in broad terms.

I also read a Bell Direct research report that mentioned VRT having more older surgeons, and the risk of their pending retirements, not sure if MVF have a higher proportion of younger doctors?

 

[TPI]

Also until now I didn't realise there were such things as cyclical healthcare stocks, which are typically called "defensive", but there you go! So perhaps these ART stocks will come with greater share price volatility, but also greater opportunity to buy at a discount in short-term downturns.

 

[DeepState]

Also until now I didn't realise there were such things as cyclical healthcare stocks, which are typically called "defensive", but there you go! So perhaps these ART stocks will come with greater share price volatility, but also greater opportunity to buy at a discount in short-term downturns.

ART is cyclical. It is a 'luxury', unlike pharma or getting so sick you end up in hospital. They are price sensitive and appear impacted by macro conditions. For DCF, some allowance for this is probably sensible.

 

[DeepState]

DeepState,

Do you have any further thoughts on VRT as opposed to MVF?

Do you feel that MVF is a better play on this sector than VRT?

From my reading, VRT has the leading market share in Australia, with full service and low-cost clinics, the most fertility surgeons, as well as market leading positions in Ireland and a new clinic in Singapore, along with genetic diagnostic testing revenue and day hospital revenue (half of which are derived from non-IVF services). So wouldn't the market leading domestic position and perhaps more diversified earnings streams make this a better choice?

In terms of intrinsic value, my rough calculations suggest MVF is still under-valued, with VRT fairly valued in broad terms.

I also read a Bell Direct research report that mentioned VRT having more older surgeons, and the risk of their pending retirements, not sure if MVF have a higher proportion of younger doctors?

Have not done a lot of work into VRT. Just looking at straight P/E, it doesn't make sense to me on face value in terms of the gap. Per prior posts, MVF-AU looks good for a long term position to me. I am concerned about FET technological progression and will need to investigate further.

Bigger is not necessarily better. It also depends on the price you pay for it. Having more non-IVF revenue still links on to getting the IVF patients in. They also come with higher proportionate costs than straight IVF. On this basis alone, I cannot make a judgment as to whether this is a good thing to pursue. It can also be replicated. MVF is growing in Malaysia and has the usual upside story. It is also branching into the same areas as per VRT-AU. There is a first-mover advantage in that territory is claimed and would become sticky. However, for the newer services, the field is pretty wide open.


From the MVF prospectus:
Relatively young, limiting retirement risk: Monash Group’s top five Fertility Specialists (in terms of Patient Treatment volumes) have an average age of 47, which is relatively young for the field of Assisted Reproductive Services. In FY2013, 66% of Monash Group’s Patient Treatments were also performed by Fertility Specialists under the age of 55. Monash Group’s younger Fertility Specialists are growing their Patient Treatment volumes at faster rates than average growth rates.

 

[johnpendles]

Announced that MVF has purchased Sydney Ultrasound for Women, a market leading imaging service.

Price up today despite going ex-dividend.

 

[galumay]

Announced that MVF has purchased Sydney Ultrasound for Women, a market leading imaging service.

Price up today despite going ex-dividend.

Was that purchased with debt? They were already geared to the hilt with almost less than 1 value for interest coverage.

 

[skc]

Was that purchased with debt? They were already geared to the hilt with almost less than 1 value for interest coverage.

Are you sure?

At half year interest expense was $2.4m. EBIT was $18.7m. That ratio is some order above 1.

 

[galumay]

Are you sure?

At half year interest expense was $2.4m. EBIT was $18.7m. That ratio is some order above 1.

OK, I hadnt looked at the H1 report, only the numbers for last FY, ratio was 0.95 and debt/equity was 76%.

 

[skc]

OK, I hadnt looked at the H1 report, only the numbers for last FY, ratio was 0.95 and debt/equity was 76%.

I am not 100% certain why the numbers looked funny on last year's report. The P&L is clouded with one-off's from the IPO and other re-organisation costs, while the balance sheet had a large debt which I think was eliminated with the IPO. The lastest half year should present a picture closer to what it should look like going forward.

I could be very wrong but DeepState would probably be all over it.

The latest acquisition will be done with a mix of cash and script, with the cash component being a mix of cash on hand and debt. I have not come across any mention of the actual amount of cash vs debt (although I only skimmed the preso).

 

[galumay]

I am not 100% certain why the numbers looked funny on last year's report. ...

I realised all that you say after I had a deeper look, I shouldnt have commented really - my look had only been cursory prior to the H1 release. Now I have had time to go over everything in more detail it certainly looks much better than my first impression!

 

[DeepState]

The company balance sheet was substantially delivered with the IPO. Interest is well covered. They paid out a dividend as per policy despite knowing this was coming.

SUFW is a major acquisition for MVF-AU. It will provide a nucleus in the NSW market which ARS/IVF services can be built around to some degree. MVF-AU is light on in NSW. This is a transformative move in this region.

MUFW, the dominant ultrasound (for women) provider in Vic had revenue of $5.1m for FY13 pro forma. SUFW generated $19m in FY14. In combination, ultrasound will make up about 20-25%% of revenue for MVF-AU. It is the dominant player in this market. Diagnostics is a key platform through which revenue per patient and, presumably, profit per patient is expected to grow. Genetic screening and fetal testing revenues are growing strongly too. It will also deliver revenue which is not directly linked to IVF. Looks to be a strategically a good move. Whether it was a good move will also depend on the price.

The debt facilities are now maxed out and they drew down on cash as well from the looks of things. In the immediate term, growth will be funded from cashflow, partly through bolt-ons. As interest rate risk has been reduced via swap agreements on floating to fixed for half the book, there is limited concern for deterioration arising from interest rate level changes. EBITDA is accelerating rapidly as fixed cost components become ever smaller elements of the total margin.

The equity issuance is at market rates. It's hard to tell if the deal would have been accretive in underlying had it been entirely debt financed from what has been released and the info to hand. With interest rates so low, it's not much of a hurdle to make that claim. NPAT contribution from ultrasound was not disclosed in the Prospectus to my knowledge. I also have no idea what the balance sheet they bought looks like. All will be revealed in the FY report, I guess. Some synergies should be readily achievable within the ultrasound part of the business.

Overall: Good strategic move. Well within zones of competence and within core target markets. Hard to know the valuation impact. Shows desire to grow dynamically rather than organically. Fast becoming more women's health and less of IVF/ARS, although that is still it's core by quite some margin.

 

[SuperGlue]

Announced that MVF has purchased Sydney Ultrasound for Women, a market leading imaging service.

Price up today despite going ex-dividend.

Has it got to do with this article in the Business Spectator
Old news, with a bit more news.

"Monash IVF targets Asian expansion."

http://www.businessspectator.com.au...aceuticals/monash-ivf-targets-asian-expansion

 

[TPI]

Have not done a lot of work into VRT. Just looking at straight P/E, it doesn't make sense to me on face value in terms of the gap. Per prior posts, MVF-AU looks good for a long term position to me. I am concerned about FET technological progression and will need to investigate further.

Bigger is not necessarily better. It also depends on the price you pay for it. Having more non-IVF revenue still links on to getting the IVF patients in. They also come with higher proportionate costs than straight IVF. On this basis alone, I cannot make a judgment as to whether this is a good thing to pursue. It can also be replicated. MVF is growing in Malaysia and has the usual upside story. It is also branching into the same areas as per VRT-AU. There is a first-mover advantage in that territory is claimed and would become sticky. However, for the newer services, the field is pretty wide open.


From the MVF prospectus:
Relatively young, limiting retirement risk: Monash Group’s top five Fertility Specialists (in terms of Patient Treatment volumes) have an average age of 47, which is relatively young for the field of Assisted Reproductive Services. In FY2013, 66% of Monash Group’s Patient Treatments were also performed by Fertility Specialists under the age of 55. Monash Group’s younger Fertility Specialists are growing their Patient Treatment volumes at faster rates than average growth rates.

Thanks DeepState, I think they will both do well in the longer term, though it maybe harder to pick a winner in the short-medium term. I might just hedge my bets and have a bit of both, but will ponder this further.

 

[galumay]

According to RBS Morgans the acquisition will mean gearing will increase to 76%, interest cover will be 6.2.