Ann: Financial Results Presentation FY2019, page-4

This sort of business reminds me of the radiology industry where the control of input costs tends to reside not less with radiology companies, and more with the critical suppliers of IP, namely the specialists (i.e., the radiologists and in this case the fertility specialists).  

MVF's loss of a key revenue generating specialist in FY2018, and the disengagement of a number of referring doctors, as recently announced, bear witness to this sort of business risk.


Notwithstanding, as financial results go in what was tough reporting season, this one from MVF was quite commendable, I think.  Especially in the context of the circumstances facing the company, both in the sluggish external business environment as well as given some of the internal issues that the company was cycling relative to previous periods.

Specifically, the second-half result saw 8% increase on pcp in EBITDA and EBIT with EBITDA in the Australian business growing by 7% and the International operations by 31% (cycling a strong pcp which saw 50% growth). [For context, International now contributes 15% of MVF's operating profit.]


So, the way I view this company as an investment proposition is that it is a business that has some inherent risks, but it is highly cash generative (with the attendant high returns on capital), and is currently performing well, despite the weak macroeconomic backdrop.

The issue, as is always the case, is what are appropriate valuation multiples that need to be applied to such a business.  When it was first IPO'd, it happily traded a premium-to-market multiples for several years.

But as subsequent events have shown, this does not deserve to be rated as a premium-to-market security.
At best, it should be valued at a modest - 10% to 15% - discount to the broader market, I feel.

That implies a P/E multiple of around 14 times.   
Based on the trailing EPS of around 8.9c, that equates to a fair value price of around $1.25/share.

As across reference, MVF generates around $25m pa of Operating Cash Flow and invests around $6m to $7m in PP&E and R&D, for Free Cash Flow of around $18m, or 8cps.  Which equates to a FCF yield of a little more than 6% based on the crude P/E derived fair value... which I think is nothing too outrageous and "feels" about right, and even somewhat attractive especially since the bulk of the Free Cash Flow gets distributed to shareholders.

At the current share price, the stock is trading on a FCF yield in excess of 8% (a P/E of around 12x, even if the company is unable to offset any of the $1.5m to $2.5m NPAT drag this year from the 5 doctors who will no longer be referring MVF services), which looks quite attractive, I think....especially in a market where obvious undervaluation is hard to come by.

Accordingly, I last week started buying the stock on the basis of it appearing to be fundamentally cheap and that it would likely carry its ex-dividend date reasonably well.

The latter assumption - that of the stock carrying the dividend well - has proven to be correct, but it is unclear what will validate the former assumption, namely a return of the share price to my assessment of fair value.
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