Shares in Monash IVF Group Ltd (ASX: MVF) went limp today after the reproductive services group posted revenue and earnings growth that fell short of its prospectus forecast.
The stock tumbled 3.5% to $1.12 when management unveiled a 9.6% increase in sales to $125 million as earnings before interest, tax, depreciation and amortisation (EBITDA) grew at a slower clip of 4% to $41.3 million for the year ended June 30, 2015.
The results stand in contrast to the company's guidance of $30.3 million in revenue and $45.1 million in EBITDA that it issued when it floated in June last year.
A slower-than-expected growth in the assisted reproductive services (ARS) market was blamed for the revenue and earnings miss with the market only increasing 1.1% instead of 4.1% that the group was expecting.
But that's not the only thing putting pressure on the group. Its expansion into low intervention clinics also didn't go to plan due to a delay in the startup of its BUMP IVF facility in New South Wales and a slower-than-anticipated ramp-up.
Low intervention clinics also operate on lower margins but the silver lining is that there doesn't seem to be any cannabalisation of its full service clinics.
The result is a setback but I believe the stock still looks attractive for a number of reasons.
Firstly, my main concern was Monash IVF's loss of market share due to Primary Health Care Limited (ASX: PRY) entering the market but that appears to have hurt Virtus Health Ltd (ASX: VRT) more as Monash IVF actually managed to increase its ARS market share to 39.5% from 38.8% in key markets (excluding acquisitions).
Secondly, the ARS market is pretty erratic and tends to grow in spurts. Most experts agree with management that the ARS market will revert to the mean and grow by around 4.1% a year on average over the medium term.
Encouragingly, the market grew by 5.8% in July.
While the overall market growth is outside management's control, shareholders are well compensated to wait with the stock generating a yield of around 9% if franking credits are included.
Further, the stock is cheap as it sits on an undemanding 2015-16 consensus price-earnings multiple of 9x.
As long as you don't think there is a structural issue with the ARS market, Monash IVF makes an attractive buy.
The stock is trading 39.5% below its initial public offer price of $1.85.