Global Health Limited grows profit and ramps up research in FY 2014: Should you buy?

Medical software provider Global Health Limited (ASX: GLH) continued its turnaround in FY 2014, posting a 16% increase in revenues and a 32% increase in NPAT.

The most pleasing aspect of the report was that sales of the Mastercare Electronic Medical Record system to the non-acute health sector improved by 23%. This product targets diverse clients such as psychology practices and thus there is less risk of the loss of a single important client. Furthermore, this is the business line that I believe can achieve the most growth within Australia.

However, one factor on shareholders’ minds will be the vastly increased capitalised research and development (R&D) spending, which was up over 33%. The company spent about $1.1 million developing software, and received a grant of  $482,000 for developing new products that ought to benefit shareholders in years to come. On a basic level, if you believe in the business opportunity, it follows that the company should be aiming to have the best product suite it can.

On the other hand, much will depend on how effective this R&D spending actually is. As new products begin to earn revenue, the company will gain a better idea of whether those R&D intangibles are undervalued or overvalued on the balance sheet. At this stage, it’s simply not possible for anyone, let alone retail investors, to know the value of this research.

The company is continuing to develop its cloud offerings, because these kind of products are far more easily scalable and progressively more useful as telecommunications improve. With that in mind, the company has begun the process of selling into South East Asia, possibly from the existing office in Malaysia. Although no sales have yet been achieved, should the company successfully expand into these developing countries, it would likely be worth far more than its current $18 million market capitalisation.

Even without successful overseas expansion, the company is arguably worth more than that based on its prospects in Australia. The CEO Mathew Cherian has led me to believe that only new product R&D is capitalised, although obviously the definition of what is new and what is simply improved or updated may at times be ambiguous.

However, I think its reasonable to assume that allowing for a small amount of capital expenditure to keep products competitive, free cash-flow (when you exclude capex on new products) is somewhere between $1 million – $1.2 million.

If that’s correct, then the company still looks like pretty good value at around 55c – 60c, considering that there are still plenty of potential non-acute customers who could benefit from the company’s software. Shareholders are doubtless mindful of the fact that healthcare spending will grow with the ageing population, and increasing awareness of mental illness.

The bottom line is that the results of the current pilot program for integrated cloud applications are extremely important. The new software as a service model is expected to result in a “significant improvement in the efficiency of [customers’] operations.” If it does, the chances that Global Health can grow into a much bigger company are very much improved.

While Global Health is an interesting investment opportunity - and potential big winner - this kind of investment is pretty risky, and should only be attempted as part of a portfolio approach. It is essential that you invest in your own knowledgebecause that will generate the best returns over time.

You simply can't afford not to open your mind to new ideas, so check out our 10 step guide to becoming financially independent.

Or if you've already learnt some of the basics, here's a great FREE primer on Warren Buffett's basic teachings. I recommend reading all his shareholder letters: here's why.

Motley Fool contributor Claude Walker (@claudedwalker) owns shares in Global Health.

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