Volpara Health Technologies Limited

Company Overview: A software application-based company, Volpara Health Technologies Limited (ASX: VHT) was formed in 2009 and offers breast imaging analytics services and products. The company provides superior-quality and personalised breast cancer screening software applications to its patients.

VHT Details

VHT Rides on Strong Product Adoption & Expanding Geographic Reach: VHT today closed its largest-value contract to date with a leading US outpatient diagnostic imaging provider and is expected to deliver US$2.15 million in revenue over a period of five years, demonstrating US$430K in ARR (Annual Recurring Revenue). With this, the company is witnessing enormous momentum for its Breast Health platform and remains focused to build an improved patient experience, clinical software, quality management, and personalised care systems.

Q2FY22 Key Highlights:

• Higher Annual Recurring Revenue: ARR has clocked ~NZ$29 million (~US$20.4 million) in Q2FY22, up ~10% since Q4FY21 end. The average revenue per unit (ARPU) clocked at US$2.04 during the quarter, compared to US$1.42 in 1QFY22, primarily driven by significant volume deals.
• Usage of Software Product: In Q2FY22, the company reported a minimum of one software product, which was availed for the screening of ~34% safer and more relaxed breast cancer screening facility for women in the US, up from ~33% at the end of the Q1FY22.
• Collaboration Agreements: VHT inked collaboration deals with lung cancer AI leaders Riverain and RevealDX and a genetics partnership agreement with Natera. In FY19, VHT strengthened its foothold in the lung cancer screening market with the acquisition of MRS Systems, Inc. Notably, Volpara® Lung^TM software presently covers ~8% of the US market. The company aims to build digital health solutions to facilitate personalised breast cancer screening software applications in the US with these collaborations.
• Other Operational Highlights: During the period, the company inked Analytics™ contract with a large East Coast, originally referred to as pre-COVID in excess of US$200,000 per annum. It also expanded two major current Analytics customers by US$70,000 and US$35,000, respectively, taking both the contracts to ~US$250,000 per annum. Further, VHT upgraded Multiple Patient Hub, moving to multi-year SaaS contracts.

The company is involved in the R&D and manufacturing of breast imaging analytics and analysis products, which is expected to strengthen its foothold in the US market. The below picture depicts continuous growth trajectory in the company’s ARR in the past quarters and years.

ARR Trend; Analysis by Kalkine Group

A Sneak Peek at FY21 Key Aspects:

• Improvement in Top and Bottom Line: In FY21, the company reported total revenues of NZ$19.7 million, depicting an increase of 57% year over year, owing to higher subscription revenues, which rose ~99% year over year, thanks to the ongoing transition to SaaS for MRS legacy products. Net loss after tax improved ~14% year over year, primarily due to a higher revenues base and the control of operating expenses.
• Decrease in Cost of Revenues: In FY21, VHT’s cost of revenues decreased 5% year over year, owing to enhanced focus on cost-cutting initiatives, higher scalability of Microsoft Azure.
• Capital Raising Program: Since ASX listing in 2016, VHT successfully raised A$132 million, including A$37 million before costs from a successful placement and subsequent Share Purchase Plan in May 2020.
• Acquisition Synergies: The company completed two significant acquisitions of MRS Systems, Inc., and CRA Health, LLC. As the business holds the ability to carry out additional acquisitions, it is seeking to discover the next set of quality businesses that can perform as drivers for future growth.
• Decent Liquidity Position: The company exited FY21 with a cash balance of NZ$32.2 million, up from NZ$31.4 million reported at the end of FY20. Total debt at the end of FY21 stood at NZ$5.37 million.

Key Metrics: In FY21, the company’s gross margin stood at 91.4%, higher than the industry median of 57.7%. Cash cycle days in FY21 stood at -36.4 days as compared to the FY20 figure of 1.7 days. Debt to Equity ratio in FY21 stood at 0.07x.

Profitability and Liquidity Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 34.26% of the total shareholdings, while the top 4 constitute the maximum holding. Harbour Asset Management Limited and Allen (Roger) are holding a maximum stake in the company at 10.03% and 7.35%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis:

• The company is susceptible to high competition risk in lungs and breast contracts space with minimal product differentiation.
• The fast-mutating SARS-CoV-2 through its continuous practice of bringing in new virus variants may dampen the sustainability of the ongoing economic rebound process, thus pulling down VHT’s revenues.
• Further, forex headwinds, and delays caused by regulatory approvals, and uncertainties may erode bottom-line growth.
• Rising expenditure, due to higher investments in its Platform and IP, may limit margins, going forward.

Guidance: VHT has rapidly grown its SaaS operations with increasing ARPU, which has brought new orders in the pipeline. Whilst significant organic growth exists, VHT continues to probe into M&A activities for quick expansion or integration of the customer base. The company aims for new partnering agreements in the days ahead, especially around lung cancer screening. For FY22, the company is expecting to increase revenues by more than 25% over FY21 to ~NZ$25 million by selling cancer screening software platforms. The company is likely to invest in Volpara Lung in FY22, and offer large hospitals, thereby providing a wide range of services and opening new growth opportunities with ideal customers.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative) 

Source: Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: The stock of the company has been corrected by ~15.03% in the past nine months. Currently, the stock has a 52-week’s high and low level of $1.715 and $1.05, respectively. The stock has been valued using an EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight discount compared to its peers’ average EV/Sales multiples, considering integration risk, cybersecurity risk, volatility in the healthcare industry, rising expenditure, etc. For the purpose of valuation, peers such as Nanosonics Ltd (ASX: NAN), Medical Developments International Ltd (ASX: MVP), and others have been considered. Considering decent robust Q2FY22 performance, optimistic long-term outlook, higher demand for breast imaging analytics products, healthy balance sheet, collaboration synergies, strong foothold in lung cancer screening, valuation, and current trading level, we recommend a “Buy” rating on the stock at the current market price of $1.17, as on October 6, 2021, 10:47 AM (GMT+10), Sydney, Eastern Australia.

VHT Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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