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Why I think Volpara Health Technologies Ltd is a small cap to watch

On Monday, medical technology company Volpara Health Technologies Ltd (ASX: VHT) completed an institutional placement raising $15 million at 60 cents per share. The offer price represented a 13% discount to the closing price of 69 cents on April 24, the last trading day before the offer was announced.

The raising was oversubscribed with strong interest shown from Australian, European, Asian and New Zealand based institutional investors. Existing eligible shareholders will also have the opportunity to participate in a share purchase plan at the same price raising an additional $3 million.

SaaS growth

Volpara is a Software as a Service (SaaS) company focused on the early detection of breast cancer by using artificial intelligence to improve the quality of breast screening. The company’s clinical support software provides clinicians with real-time feedback on breast density, compression, dose and quality. Volpara also offers an enterprise software solution that provides a wide-range of benchmarking measures to assist breast imaging clinics in managing their businesses.

The company’s latest 4C report revealed that it is continuing to grow sales rapidly with annual recurring revenue (ARR) standing at NZ$3.6 million at the end of Q4FY18, up 223% on the prior corresponding period. Volpara now projects ARR to grow to NZ$9 million by the end of FY19. However, while the company continues to see strong revenue growth it is still losing cash after posting a quarterly loss from operating activities of NZ$2.1 million.

The funds from Volpara’s capital raising will be directed towards a number of areas. Around NZ$9 million will be used to accelerate sales growth in the United States by increasing the company’s sales and marketing teams. Volpara also plans to spend NZ$4 million to roll out new features for its software to increase the fee per woman, which currently stands at ~US$1.90 – $3.60 per woman screened. A further NZ$2 million is projected to be spent on commercialisation in the Asia Pacific region with the residual funds to be used for working capital purposes.

Foolish takeaway

Volpara continues to make inroads in the US market with the company increasing the amount of US women analysed by its software from 0.7% to 3.2% of total screenings over the last 12 months. The company projects this number to rise to 9% by the end of FY19.

Volpara is attempting to emulate other Australian listed SaaS companies who have enjoyed considerable success such as Xero Limited (ASX: XRO) and WiseTech Global Ltd (ASX: WTC), albeit in a different industry.

With a diluted market capitalisation of $100 million at current prices, Volpara trades at a valuation multiple of 12 times estimated forward revenues. The current capital raising could keep a lid on the share price in the near term as the market absorbs the increase in scrip. Nevertheless, the company is one investors should consider following in the small cap space over the next couple of years.

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Motley Fool contributor Tim Katavic has no financial interest in any company mentioned. The Motley Fool Australia owns shares of VOLPARA FPO NZ, WiseTech Global, and Xero. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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