The healthcare imaging software provider Pro Medicus Limited (ASX: PME) share price traded 1.7% lower this afternoon following the release of its half-year results. I suspect the reason for the slight fall is simply that Pro Medicus shares are richly priced given they trade on a historical price-to-earnings ratio (PER) of a whopping 73.6x. Here are the highlights of what was a sound set of results.
- Revenue up 6.4% to $15.2 million
- Underlying profit before tax (PBT) up 16.1% to $5.9 million
- Net profit after tax (NPAT) up 63.1% to $4.8 million
- Unfranked interim dividend of 1.5 cents, flat year on year
- Cash reserves up $3.2 million to $20.3 million
The underlying PBT comparison adjusts for one-off restructuring and legal costs last year and strips out currency moves. It makes sense to me to adjust for these items and so I think the underlying PBT numbers provide an accurate depiction of year-on-year progress.
Whilst 16.1% growth in PBT doesn't appear to justify such a lofty earnings multiple, Pro Medicus has already locked in further profit growth over the next few periods thanks to a number of significant multi-year contract wins last year.
It also operates a highly attractive business model characterised by the following features.
- Contracts typically provide revenues over a multi-year period.
- A large chunk of revenue is charged on a usage basis with locked-in minimums. Demographic trends are driving long-term growth in the healthcare industry in general which should translate to increased usage of Pro Medicus software.
- Pro Medicus software is embedded in its customers' workflows which means it is unlikely they will switch to an alternative provider. This also means that sales typically have long lead times and it can take a while for new contract wins to convert to revenues.
- As a software company, Pro Medicus has minimal variable costs and so a high percentage of incremental revenues convert to profit.
In addition to the above attractive qualities, Pro Medicus CEO Sam Hupert reckons that the company's "technology is still 18 months ahead of the market and in some areas, possibly more." If this is true, then all else being equal further large contract wins are likely in the future.
Considering all the above it is easy to see why the market values this company so highly. The only reason that I don't own this share is that I feel a lot of future outperformance is already baked into the share price.
