Virtus Health Snagged By Competition

This story features MONASH IVF GROUP LIMITED. For more info SHARE ANALYSIS: MVF

-Question over leverage in NSW
-Opportunities to grow still
-Long-term fundamentals intact
 

By Eva Brocklehurst

Virtus Health ((VRT)) has hit a snag. The IVF company has downgraded earnings guidance to "low to single digit" for FY15 from "low to mid teen" growth, as aggressive peers make inroads in market share amid delays to its Singapore expansion.

The market gave the stock a drubbing but brokers, while cooling their ardour, are not completely negative. Morgan Stanley considers the known risks are reflected in the price and retains an Overweight rating. The company is suffering from lingering low growth in the market and, while downgrading earnings forecasts by 10%, the broker believes a rebound is on the cards, although this may not occur until after the first half of FY16.

Virtus Health gave up market share in three states in recent months. Morgan Stanley did not expect it to lose share in Queensland and Victoria and suspects Monash IVF ((MVF)) may have been the culprit. The NSW issues created by a "bulk-billing competitor" suspected to be Primary Health Care ((PRY)), should now be regarded as an ongoing concern. The broker had anticipated initial enthusiasm in regard to this clinic would have dissipated by now but it appears this is not the case.

The company also flagged the impact of the Sydney storms on its clinic at Maroubra, as it cannot service new patients until August 15. Furthermore, Singapore has been slower than expected to start up and will contribute a $1m loss to the downgraded forecasts. UBS expects the company will continue with its expansion strategy nonetheless, looking to to the UK for acquisition opportunities. UBS reduces FY15 estimates by 7.5%, downgrading to Neutral from Buy. The broker considers this is the most suitable rating at present, allowing a re-examination of growth options.

Macquarie also downgrades to Neutral from Outperform. The broker is concerned at how quickly the outlook has deteriorated. Moreover, the company is losing market share and not leveraged to a potential rebound in volumes. Industry data was showing signs of recovery, particularly in NSW, but Macquarie now considers its interpretation that it would benefit Virtus Health is incorrect. Instead, growth in NSW is being attributed to Primary Health, a new entrant in the fertility clinic business, which has the benefit of owning a chain of medical centres.

The broker considers growth will return to the industry when broader macro economic conditions stabilise and there are a number of value accretive acquisition opportunities, both domestically and offshore.

Following a downgrade to forecasts and valuation Morgans maintains an Add rating, expecting the yield will underpin the share price and the long-term fundamentals remain intact. The broker was surprised at the competitive impact in NSW, where Primary Health is considered to have picked up most of the cycle growth over the last three months. Yet, longer term, Morgans believes Primary Health will struggle to make a meaningful impact given the complexity of the IVF process and an increasing requirement for transparency around IVF centre success rates.

There are two Buy and two Hold ratings on FNArena's database. The consensus target is $7.37, suggesting 23.4% upside to the last share price. This compares with $8.70 ahead of the update. Targets range from $7.00 (Macquarie) to $7.74 (Morgans). The dividend yield on FY15 and FY16 forecasts is 4.4% and 4.8% respectively.
 

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