The Pro Medicus share price is down 30% in 2022. Is it a buy?

This ASX share has a very high profit margin. But after the volatility, is an opportunity?

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Key points

  • Pro Medicus is making rapid progress by winning new contracts
  • It has a very high EBIT margin of around 65%
  • Morgans thinks it's a buy, though Citi is only neutral on the business

The Pro Medicus Limited (ASX: PME) share price has dropped quite a bit since the beginning of 2022, down by 30%.

However, the company came roaring back on Friday, rising by 8%. With investor sentiment returning (at least temporarily), is the ASX healthcare share an attractive idea?

Pro Medicus is a business that describes itself as a leading healthcare informatics company. It provides a full range of medical imaging software and services to hospitals, imaging centres and healthcare groups worldwide. The company boasts that it offers a comprehensive end-to-end offering.

Ongoing contract wins

While the Pro Medicus share price has been suffering, it has continued to win contracts with clients.

For example, earlier in June, it signed two contracts with a combined minimum value of $47 million. Sutter Health renewed for seven years and WellSpan Health renewed for five years. The contract renewals are transaction-based with potential upside. The renewals were negotiated at an increased fee per transaction.

Pro Medicus’ CEO says its renewal success rate sends a positive message to the market and helps build on its network effect.

At the start of June it also won a seven-year, $28 million contract with Allina Health. Pro Medicus says this continues the company’s rapid expansion into North American integrated delivery networks (IDN).

The Allina Health win was the fifth major contract in the North American IDN space in 18 months. Pro Medicus says that IDNs are important and growing because of the trend towards value-based medicine coupled with industry consolidation.

Strong financials

The company is showing high and increasing levels of profitability.

In the FY22 half-year result, it generated 40.3% growth in underlying revenue to $44.3 million, helping net profit after tax (NPAT) increase by 52.7% to $20.7 million.

Pro Medicus has a high earnings before interest and tax (EBIT) margin of 65%, which means that a lot of revenue turns into profit.

The company is debt free and the business continues to lift its dividend at a fast rate. The HY22 dividend increased by 42.9% to 10 cents per share.

Is the Pro Medicus share price a buy?

The broker Morgans thinks the business offers plenty of upside. It has a buy rating on the Pro Medicus share price, with a target of $56.20. That’s a possible rise of around 30%.

Morgans likes the momentum that the ASX share is achieving and its online offering has attractive strengths compared to its competition. The fact that its clients are organisations rather than households is a useful feature in this high-inflation period.

Citi is ‘neutral’ on the business, with a price target of $46. That implies mid-single-digit potential for the Pro Medicus share price. The broker notes the recent renewals at a better price per transaction as a positive. It thinks the company can keep growing its market share.

Both brokers think the business is valued at around 84x FY23’s estimated earnings.

Citigroup is an advertising partner of The Ascent, a Motley Fool company. Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Pro Medicus Ltd. The Motley Fool Australia has positions in and has recommended Pro Medicus Ltd. 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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