Small Caps | Jun 03 2014
-Opportunity for European expansion
-Immediately accretive
-More acquisitions highly likely
By Eva Brocklehurst
Reproductive health specialist, Virtus Health ((VRT)), has followed through on plans outlined at its IPO a year ago to move a highly successful model offshore. Singapore was considered the likely first choice for expansion, where the company has a dedicated office, but instead Ireland has turned out to be the first port of call. Virtus Health will acquire 70% of SIMS IVF, a reproductive services provider, and now has the opportunity to use this as a platform to expand in Ireland and into the UK.
Macquarie believes the acquisition price – at around 8.5 times SIMS earnings – means significant earnings upside should be forthcoming, while Virtus Health will benefit from ongoing margin expansion and operating efficiencies. Ireland has a similar population profile in terms of fertility rates compared with Australia but IVF usage is less than half that of Australia, primarily attributed to the lack of government funding. SIMS controls 25% of the Irish market with a strong focus on clinical and scientific excellence, with its IVF pregnancy rate materially higher than the Irish average. Macquarie notes, despite a lack of government funding, prices in Ireland are similar to Australia. SIMS produces higher revenue per cycle as it has a more diversified revenue stream. The broker maintains an Outperform rating and raises the stock's target price by 5% to $9.80.
The two founding doctors will retain a 30% stake but Virtus has the right to acquire these shares in two tranches in 2017 and 2019. The acquisition price, around $23m, will be funded from existing facilities. The acquisition is immediately accretive on UBS' forecasts, at around 4.5% for FY15, and the broker retains a Buy rating, raising the price target to $9.15 from $8.65. UBS expects a relatively unconsolidated European market will present further accretive acquisition opportunities and Virtus can leverage its corporate advantage beyond capital, such as integrating marketing skills, which have potential to drive even higher growth rates.
The acquisition was some time coming but fits with the stated strategy and provides good growth potential, in Morgan Stanley's opinion. The company's business model generates significant cash and Morgan Stanley expects this cash to continue to be utilised in offshore expansion. The Irish acquisition is strategically solid and net debt should fall to $129m by the end of FY15. The broker considers the company is being conservative in its estimates, given growth and synergies, and forecasts the SIMS acquisition could prove as much as 10% accretive to FY15 earnings. Morgan Stanley retains an Equal Weight rating with a price target of $8.61 – upgraded from $7.66 – and a 3.0% fully franked dividend yield. The broker also believes potential catalysts could come from closer to home such as a competitor in an Australian state where Virtus does not operate.
Morgans (as opposed to Morgan Stanley) thinks the Irish acquisition is modest and, while not modelling acquisitions specifically into estimates, already forecasts 6% cycle growth. Hence, the broker believes the upside is captured in current forecasts and retains an Add rating and $8.96 target. Expansion overseas was well flagged from the outset and Morgans believes the retention of a 30% share by the founders is a sensible decision because it aligns the interests of both groups.
See also Yeah Baby: Virtus Health On A Growth Path on May 14 2014.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
