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3 great reasons to own Pro Medicus (ASX:PME) shares

There are quite a few reasons why Pro Medicus Ltd (ASX:PME) shares are so good and worth owning, including its large profit margins.
The post 3 great reasons to own Pro Medicus (ASX:PME) shares appeared first on The Motley Fool Australia. –

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Pro Medicus Ltd (ASX: PME) is a really good business and there are quite a few good reasons why it’s worth owning.

What is Pro Medicus?

Pro Medicus describes itself as a leading medical imaging IT provider. It provides a full range of radiology IT software and services to hospitals, imaging centres and health care groups across the globe. Visage Imaging has become a global provider of enterprise imaging.

The healthcare technology business is currently led by Dr Sam Hupert, who has a long history with the business and is currently a very substantial shareholder, owning around a quarter of the business.

The following three things are very good reasons for owning Pro Medicus shares:

Enormous profit margins

Pro Medicus has very impressive profit margins, much higher than most other businesses. The higher the profit margins, the more that new revenue can turn straight into profit for shareholders.

The ASX share saw its earnings before interest and tax (EBIT) margin improve from 51% to 59% in the FY21 half-year result. It also had a very high net profit after tax (NPAT) margin of 43%.

However, management noted that the EBIT margin may not remain as high as 59% because of short-term COVID-19 factors.

Dr Sam Hupert explained:

Costs associated with travel and the RSNA, the large conference we always attend at the end of November (which was virtual in 2020) were significantly reduced, with this partially offset by increased legal expenses as a result of the recent contracts we have won.

So, whilst we expect post-COVID to resume travel and attend conferences, we think our capacity to do things remotely, both in terms of sales and implementations, will mean there will be a “new normal” where we can do more off-site than we previously did without reducing our effectiveness. We think this will result in savings going forward. So, whilst we don’t envisage that 59% margins are sustainable long-term, we believe there is scope for margins to improve on what they have been historically.

Strong revenue pipeline

The business has won a number of key contract wins, including four during the six month period to 31 December 2020. This highlights the ability for the company to service major clients, and give more proof to prospective clients that Pro Medicus is the real deal.

In September it announced a $25 million, 7-year deal with New York University Langone. Then in October 2020 it revealed a $10 million, 7-year deal with Ludwig-Maximilians University in Germany. Next, it won a $8.5 million, 5-year contract with Zwanger-Pesiri. The final big one during the period was a $18 million, 5-year contract with Medstar Health.

Subsequent to the end of the half-year, it won two further contracts totalling $71 million over seven years.

All this revenue will be earning profit at very high margins, as I mentioned earlier.

Rewarding shareholders with dividends

Pro Medicus isn’t like most other growth shares. It actually pays out a very attractive dividend, in terms of the payout ratio. In the half year result its dividend payout ratio was 54% after a 16.6% increase of the interim dividend to $0.07 per share.

The actual prospective yield for new investors is very low, but long-term shareholders are getting a nice payout.

What’s the valuation?

Broker Morgans rates the Pro Medicus share price as a hold because of how strongly the share price has gone up recently, with a price target of $41.30.

On Morgans’ numbers, the Pro Medicus share price is valued at 134x FY21’s estimated earnings and 105x FY22’s estimated earnings.

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Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Pro Medicus Ltd. The Motley Fool Australia has recommended Pro Medicus Ltd. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

The post 3 great reasons to own Pro Medicus (ASX:PME) shares appeared first on The Motley Fool Australia.

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