Volpara Health Technologies Limited

Company Overview: Volpara Health Technologies Limited (ASX: VHT) is a software application-based company, which is engaged in offering breast imaging analytics services and products. The company provides superior-quality and personalised breast cancer screening software applications to its patients. Formed in 2009, the company focuses on lowering the death rate and cost of breast cancer via Volpara software. 

VHT Details

Robust Customer Base Expansion & Acquisition Synergies Aid VHT: Volpara Health Technologies Limited (ASX: VHT) entered FY21 on a positive note and remains well placed with its existing product suite and the addition of CRA's market-leading risk software. These initiatives aid the company to capitalise the risk and genetics markets.

VHT’s Key Strategies to Strengthen its foothold in the US market:

In FY21, the company reported a minimum of one software product, which was availed for the screening of ~32% safer and more relaxed breast cancer screening facility for women in the US, up from ~27% at the end of the FY20.

• Acquisition Synergies: With the acquisition CRA Health, LLC, one of the top providers of risk assessment tools within major EHR systems, VHT’s mission to protect families from cancer by preventing advanced-stage breast cancer remains on track.
• Building Digital Health Solutions: The company aims to build digital health solutions to facilitate personalised breast cancer screening software applications in the US.
• Higher R&D Activities: 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.

In FY21, the company made substantial investments in product development and technology. The company remains focused on expanding the Breast Health Platform to build an improved patient experience, clinical software, quality management, and personalized care systems. The below picture depicts continuous growth trajectory in the company’s top-line over the last four years.

Revenue Trend, Analysis by Kalkine Group

Key Findings from FY21 Results:

• Increase in Subscription-based Revenues: During FY21, the company’s subscription revenues came in at NZ$18.1 million, depicting a rise of ~99% year over year, owing to the ongoing transition to SaaS for MRS legacy products (VHT acquired MRS Systems, Inc. in 2019).
• Rise in Gross Margins: In FY21, VHT’s gross margin stood at 91%, up from 86% in FY20, owing to enhanced focus on cost-cutting initiatives and higher scalability of Microsoft Azure.
• Higher Annual Recurring Revenue (ARR): In FY21, the company’s total ARR stood at ~NZ$27.9 million, depicting a rise of ~60% year on year, which incorporates ~20% organic growth in ARR.
• Improvement in Bottom-line: In FY21, the company’s net loss after tax stood at NZ$17.5 million, depicting an improvement of ~14% year over year, owing to an increase in revenues and the control of operating expenses. 

Healthy Balance Sheet and Decent Liquidity: During FY21, the company raised A$37 million before costs from a successful placement and subsequent Share Purchase Plan, which was completed in May 2020. This provides the company with substantial flexibility to gauge potential strategic acquisitions and expand its product offering.

• Increase in Cash Balance: At the end of FY21, the cash balance stood at NZ$32.2 million, up from NZ$31.4 million reported at the end of FY20, after the capital raise and acquisition of CRA Health, LLC. Total debt at the end of FY21 stood at NZ$5.37 million.
• Rise in Net Operating Cash Outflow. Net operating cash outflow for FY21 stood at NZ$14.02 million as compared to cash outflow of NZ$16.64 million in FY20.

Key Metrics: In FY21, the company is making efforts to improve its EBITDA margins, operating margins, ROE, and net margins. Cash cycle days in FY21 stood at -36.4 as compared to the industry median of 15 days. Debt to Equity ratio FY21 stood at 0.07x.

Profitability and Cash Cycle Profile; Analysis by Kalkine Group  

Key Update: Recently, the company announced that Monica Saini, a substantial holder of the company has acquired around 180,000 fully paid ordinary shares and disposed of ~100,000 fully paid ordinary shares for a consideration of A$108,000.00 and A$121,500, respectively.

Top 10 Shareholders: The top 10 shareholders together form around 33.39% 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 9.16% and 7.35%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders, Analysis by Kalkine Group 

Risk Analysis:

• Stiff Competition: The company operates in a highly competitive environment, which is subject to ongoing significant changes, including business consolidations, new strategic alliances, market pressures, and regulatory and legislative pressures.
• COVID-19 Led Uncertainties: The company is also exposed to risks associated with general global economic and market conditions, particularly those impacting the healthcare industry.
• Rising Expenditure: In FY21, product R&D increased 30% year on year, owing to higher investments invest in its Platform and IP, which may limit margins, going forward.
• Forex Headwinds: Any adverse movement in foreign exchange price may impact the financial performance of the company. 

Guidance: For FY22, the company is expecting to increase its revenues by 27%-32% over FY21 by selling cancer screening software platforms. It expects gross margins to be in the range of 90–92% in FY22. The company is likely to invest in Volpara Lung in FY22 and beyond, thereby aiming to be a leader in its field and provide leadership in areas such as breast cancer risk assessment.

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 ~16.43% in the past six months. Currently, the stock has a 52-week’s high and low level of A$1.715 and A$1.05, respectively. We have valued the stock using an EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). We believe that the company might trade at a slight premium as compared to its peer median, considering reasonable rise in revenues in FY22, decent liquidity position, increase in subscription-based revenues, and buyout synergies. For that purpose, we have considered peers such as Nanosonics Ltd (ASX: NAN), Medical Developments International Ltd (ASX: MVP), to name a few. Considering decent FY21 performance, optimistic outlook, higher demand for breast imaging analytics products, healthy balance sheet with an increase in the cash balance, valuation, and current trading level, we recommend a “Buy” rating on the stock at the current market price of A$1.175, as on July 7, 2021, 11.45 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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