In Brief: Pro Medicus, Trump’s Trade War & Resi Construction

Weekly Reports | Apr 12 2024

Aggressive new target price for Pro Medicus; fears of a new Trump-inspired trade war; the best REITs for falling interest rates; and lagging starts figures for residential construction.

-Big new target for Pro Medicus
-The possibility of another Trump-inspired trade war
-Preferred REITs for falling interest rates
-Gloomy outlook for residential construction

By Mark Woodruff

Pro Medicus Adds US Military Potential

While some investors may feel left behind after a withering share price rise, new broker research suggests there may still be time to climb aboard the Pro Medicus ((PME)) juggernaut.

Yesterday, shares in the provider of medical imaging technology closed at $108, up from around $74 just over five months ago and $35 at the beginning of 2021, yet Evans and Partners has now set a new target price of $152.68, well above other brokers.

The company itself has secured certification to allow targeting of the US military health market, prompting the analysts to forecast an extra 5% share of the US radiology image viewing market by 2030, bringing the total expected share to 25%.

The Federal Risk and Authorisation Management Program (FedRAMP) certification is government-wide and promotes the adoption of secure cloud services across the US federal government by providing a standardised approach to security assessment, authorisation, and continuous monitoring for cloud products and services.  

Management at Pro Medicus has chosen not to announce on the ASX the receipt of FedRAMP High certification status.

There are two arms of the US military health system: the Military Health System (MHS) which operates within the Department of Defense to provide care to those on active duty and some retirees; and the Veteran Health Administration (VHA) which is part of the Department of Veteran Affairs and exclusively treats veterans/older cohorts. 

As an illustration of size, the VHA comprises 172 medical centers and 1,138 outpatient sites, making it the largest integrated health care system in the US.

The combined 9.6 million members of the VHA and MHS account for more than 30% of the total US market (by image view volume), and could be worth up to US$500m a year, according to Evans and Partners, which notes tendering for image Viewer contracts is imminent.

Unlike Pro Medicus, none of the main picture archiving and communications systems (PACS) incumbents in the US military health system -AGFA, Philips, General Electric and Siemens- have a truly scalable cloud solution, observes the broker.

However, political considerations are at play in US government decision making, caution the analysts, and Pro Medicus has partnered with various contractors with relevant connections and expertise.

Evans and Partners identifies several other areas of growth for Pro Medicus.

Management remains confident AI will eventually add to the revenue pie and has approached the opportunity from two angles: usage of the technology behind the scenes to improve its product offering; and as a discrete offer to customers, be it algorithms developed in-house or via collaboration (e.g. breast density) and/or by utilising algorithms from third parties. 

While the analysts add 5% to each forecast contract for Pro Medicus from FY26 onwards to allow for AI, diagnostic algorithms will only become part of the service rather than a major new revenue line, in the broker’s opinion.

In time, customers may also expand contracts to include Archive and Worklist components. Currently, the analysts believe the break-up contract value is split between Viewer, Archive and Worklist by around 60%, 25% and 15%, respectively.

Pro Medicus has also noticed an uptick in enquiries from the corporate sector in recent times, with many joining forces under affiliate arrangements and looking to upgrade systems, explains the broker.

The average target price of five brokers covering Pro Medicus in the FNArena database is $78.90. If the $34.50 outlying target set by Ord Minnett is excluded, the average of the remaining four brokers is $90, well adrift of the $152.68 target set by Evans and Partners.

Worried about another Trump-inspired trade war 

The potential for another intense trade dispute between the US and China should Donald Trump become the next US President is beginning to unsettle some global investors, according to investment manager Western Asset.

Disruption may ensue for global growth, financial markets, and supply chains, in the event the new administration pursues aggressive tariff measures against China and other trading partners, suggests Western Asset, part of US-based Franklin Templeton Investments.

According to Robert Abad, product specialist at Western Asset, “another trade war at this juncture in the global macroeconomic cycle, especially one that significantly affects China's growth prospects, could reignite fears of a global recession and raise concerns about the potential inflationary consequences of higher tariffs.”

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