Things are about to get interesting in the local IVF market.
With Virtus the subject of the year’s first takeover tussle, the smart money is on its leading offshore suitor, European private equity firm CapVest, also doing some sneaky due diligence on Monash IVF, in case it gets gazumped by rival bidder BGH Capital.
IVF procedures are on the rise. Craig Abraham
“In a world where interest rates are low, the business has positive cash flow and a good growth outlook, it’s a target,” Shaw and Partners senior analyst Jonathon Higgins said.
“The way PE funds work, you have to go through a lot of work to get an investment in a sector ticked off.
“Regardless of what the PE funds do with Virtus, I think Monash will assess its capital management options and do a share buy-back, flagging that they’re cheap, in February.”
Mr Higgins’ view was supported by Morgans’ Scott Power, who agreed Monash IVF was a potential target.
“Both companies (Virtus and Monash IVF) came out of private equity when they floated, and there’s no reason why Monash couldn’t be a target as well,” Mr Power said.
While trading up 29 per cent on this time last year at 96¢ a share, Monash IVF is still well off its 2016 highs of more than $2.30.
The business has been through a turnaround period since the resignation of a few leading specialists in 2017, including high-profile former rainmaker Lynn Burmeister, which triggered an investor sell-off.
At the time, despite having more than 100 doctors, Dr Burmeister was personally responsible for about 10 per cent of the company’s IVF cycle numbers.
Mr Power said no doctor today would be responsible for more than 2 per cent of Monash IVF’s cycles.
The company has also been successful in recruiting some specialists from rival practices, Mr Higgins said.
Overall, he said the business was in much better shape than two years ago.
“Virtus is struggling, but they have a get out of jail free because of the takeover. The market knows it’s going backwards,” he said.
“Monash, however, is two years into a turnaround, and it’s doing well, advertising aggressively … and they’ve netted four or five specialists in the last 12 months.
“It’s also been opening in areas … in NSW and on the Gold Coast. It’s growing market share and is up almost 2 per cent year-on-year to 22.4 per cent.”
Virtus is the largest player in the local market, with analysts estimating it has close to 50 per cent market share.
Other players include Adora Fertility – which Virtus tried to buy for $45 million last year before abandoning its bid because of uncertainty over whether it would get approval from the competition regulator – Genea, Newlife and Dr Burmeister’s No.1 Fertility.
As Virtus and Monash IVF are the only two listed companies, Mr Higgins expects Monash IVF to get a boost in 2022, whether or not it becomes a takeover target.
“There’s capital for healthcare in funds management land, and with Virtus you have a business worth more over $500 million on an equity basis. Once that deal is done … the money has to go somewhere and 10 per cent to 20 per cent will flow to Monash IVF just based on demand and supply,” he said.
“It will be the only one left, and we’ve already seen it happen with the telcos.”
Monash IVF is considered a buy by all the analysts who cover it on Bloomberg.
The company is trading at 98¢, but the average analyst 12 month price target is $1.18, suggesting it is under-valued by about 20 per cent.
Based on the $7.60 a share bid from CapVest for Virtus, Monash IVF would be valued at $1.36 a share if a suitor came knocking with the same multiple.
“We think it’s very attractive … compared to market multiples,” Mr Power said.
“It has a good track record of hitting its guidance, and we expect the first half profit to be around $13 million. We think it’s good buying.”
Also working in Monash IVF’s favour is an uptick in the number of IVF cycles occurring each month, compared to before the pandemic.
Medicare data from November 2021 revealed the month had the highest number of stimulated cycles on record, with 5760 cycles.
The month was up 11.3 per cent on October’s numbers and analysts expect the five months leading up to and including November to have been the highest on record.
Coming as a relief to all providers in Victoria, the state’s recent (and short-lived) ban on IVF cycles because of the omicron wave was also overturned earlier this month.
Mr Power said the jump in cycle numbers was “more structural than cyclical”, meaning they’re not expected to dip back to pre-pandemic levels.
“There’s been an increased focus on family, with or without COVID-19 and the travel restrictions,” he said.
“There’s also been more emphasis on genetic testing and eliminating or reducing the chance of passing on genetic diseases.
“These sorts of things are making the growth in IVF cycles more structural.”
However, Mr Power said there had been a 15-month period of “extraordinary growth” thanks to people not being able to travel and many having more disposable income.
“Our view is that it will stay elevated, but not have the growth rates that we’ve seen.”
Between 2017 and 2022, the industry’s annual growth rate in Australia was 1.9 per cent, according to IBISworld, but between 2022 and 2027 it is expected to be 2.5 per cent.
The report said the industry would also benefit from the growing community acceptance of reproductive services, advances in diagnostic technology improving success rates, plus more scientific developments.
Despite already being a consolidated industry, IBISworld tipped this would continue in the next five years, with major players pursuing M&A opportunities.
But, smaller price-competitive clinics were also expected to enter the sector.
“Assisted reproductive services (ARS) industry dynamics remain attractive, supporting future growth of Monash. These include: Changing social factors that are delaying reproduction and the consequent decline in the level of natural conception, continued growth in the number of potential patients in the female age cohort that seek IVF treatment; and improved social awareness and acceptance of ARS treatments,” Jefferies head of healthcare equity research David Stanton said in a note.
Mr Stanton increased his Monash IVF price target this month from $1.20 to $1.22.
According to Monash IVF’s 2021 annual report, its largest shareholders are contrarian investor Allan Gray Australia (with more than 13 per cent), Challenger, Lennox Capital Partners and listed investment company Argo Investments.
The company is due to report its half-year results on February 17, but for the 2021 full-year it recorded a 26.3 per cent jump in revenue to $183.6 million, adjusted net profit of $23.3 million, up 61.5 per cent, and earnings before interest, tax, depreciation and amortisation of $51.3 million, up 56.2 per cent.
At the time the company had net cash of $8.8 million and no debt.
Mr Power said there was scope for Monash IVF to also make acquisitions. It was one of the contenders for New Zealand’s Fertility Associates last year.
“They’re sitting on a very lazy balance sheet. What they’ve told the market is they will look for opportunities to expand their south-east Asian footprint,” he said.
“Within Australia there isn’t much to buy unless they go into a different vertical, which the market would need a fair bit of convincing about.
“In Asia they operate in Malaysia, so there are opportunities to expand there.”
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