Date : 11/09/2020

Monash IVF

ASX :

MVF

Market Cap : $245.47 Million

Dividend Per Share : $0.021

Dividend Yield : 8.72 %

Buy

52 Week Range : $0.35 - $1.04

Share Price : $0.58

MVF’s stock has not bounced back yet from the pandemic. We forecast demand to rise as the economy recovers and hence, give this a “Buy” recommendation – with both dividend payouts and growth in shareholder value expected.

Company Analysis

Monash IVF Group Limited (MVF) is an Australian owned publicly traded company in the human fertility and assisted reproductive industry. The firm generates all its revenues from these services in Australia and partly in Malaysia.

MVF is the second biggest player in Australia’s fertility industry, behind Virtus Health, and ahead of Genea. They have a stellar number of clinics along with 85 fertility specialists –

  • 21 Fertility clinics
  • 18 Ultrasound clinics
  • 3 centres for assisted reproduction services
  • 2 diagnostic labs and 1 hospital

Since the IPO of Monash IVF, it has been quite busy acquiring clinics to broaden its market position and penetration levels. The current strategy of MVF is to integrate diagnostic services with fertility and seek opportunities in the Asia-Pacific region.

The coronavirus has impacted all firms in the IVF business. Monash IVF Group and others were given a temporary suspension of all non-urgent procedures by the National Cabinet. Similar suspensions were laid down in Malaysia as well – resulting in a 71% and 76% decline, respectively during the April to May 2020 period. AVF reports that it is mitigating the impacts of the novel coronavirus by taking measures designed to protect the health and safety of the patients and increase marketing spending to drive growth for FY2021. The firm also announced a $80m equity raise to reduce its debt levels and to try and mitigate the impact of the coronavirus on its financials.

Company Updates

The year-to-date chart of the MVF stock shows the dip caused by the coronavirus restrictions that were imposed on it and a further dip with a negative announcement of financials in the annual report for FY2020.

MVF has seen a growth in stimulated cycles by about 25% after recommencing treatment across Australia. New patient pipelines have also returned during May and June. However, MVF is still weary of the uncertainty of the impact covid19 may have on the markets. The firm also reported a slight increase costs due to the extra hygiene precautions that it has had to take on due to Covid19.


Source: Tradingview.com

Industry Analysis

The assisted reproductive industry is a low-volume-high-margin industry with a growth forecast of 2% for the period 2020 – 2025. It has an industry wide profit margin of 21.2%.
Women aged between 25 and 54 are the primary market for fertility treatment. However, the industry is plagued and somewhat defined by the success rates these procedures have. The success rate decreases with age, just as the fertility levels of women decreases with age – with women over 40 suffering the most with infertility. IVF procedures are time consuming – usually taking more than one cycle and come with emotional and physical side-effects.

MVF’s product offerings are not different from their biggest competitors. However, their target market is. MVF continues to drive growth in Australia by targeting the middle-to-high income groups. While Virtus Health is focussing on delivering their products at a cheaper price. Genea is not a publicly traded company and it continues to focus its efforts on China’s IVF market with its new Hong Kong owners.

Investment Thesis

MVF reported a 4.3% and 40.8% drop in revenues and net profit after tax (NPAT) in FY2020, compared to FY2019. Close to half the decline in net profits after tax came from Q4 of FY2020 – as NPAT fell by $3.9m mostly due to temporary Covid19 shutdowns.

Earnings before interest, taxes, depreciation & amortization, or EBITDA declined by $10.1m from FY1019. In a nutshell, earnings is simply revenues minus cost, and as we mentioned earlier MVF was impacted with both – decrease in revenues and increase in costs. Part of the revenues declined due to Covid19 suspensions, and the other part was due to the departure of the Victorian specialists in SA, NSW, and QLD. Whereas there was an increase in costs due to expenditures in marketing campaigns and investments in media.

At the end of FY2019, the firm’s Return on Equity was 12.1%. However, it has declined to 5.7% in 2020. This while alarming at first, on further examination, this has occurred due to the massive overhaul of the firm’s capital structure. MVF has gone from $84.7m in debt to just $4.2m – a staggering 80.5% change. This provides the firm with immense flexibility to focus on growth in the years to come and increases the financial health of firm – reducing risk.

The slump and rebound in Stimulated Cycles can be seen in the above graph. It can also be said that MVF has positioned itself well for FY2021 and beyond with a sound strategy. MVF is battling the departure of its specialists by recruiting specialists and also attract new clinicians from across Australia. This strategy reduces risk as it does not over-rely on any particular source for human capital.

MVF also pays 100% franked dividend to its shareholders. Monash IVF has the cashflows and profits to sustain a dividend payout.
The firm has had a stable dividend payout ratio at an average of 69% – slightly higher than the industry average as well.

Recommendation

In light of how the markets have reacted to the decline in financial performance and how it has partially bounced back. We believe the firm has positioned itself with risk mitigating strategies in both human capital requirements and capital requirements. This is not a high growth industry. However, we expect MVF to grow at a rate higher than the industry average in FY2021. Another added benefit of owning MVF stock is the consistent dividend payouts. With the demand in the industry increasing as the uncertainty of a post covid19 world reduces, we expect MVF shares to go up in price in the medium to long term horizon – hence, giving it a “Buy” recommendation.

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