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PME share price whacked 8%: is Pro Medicus a dog or a delight?

The Pro Medicus Ltd (ASX: PME) share price has been whacked 8% this morning after it released its FY21 half-year result.

Pro Medicus describes itself as a leading medical imaging IT provider.

Pro Medicus FY21 half-year result

The medtech ASX share revealed that revenue went up by 7.8% to $31.59 million. On a consistent currency basis, revenue would have risen 12.4% to $32.93 million.

Pro Medicus has won a number of contracts during the period including New York University Langone ($25 million), Ludwig-Maximillians University ($10 million), Zwanger-Pesiri ($8.5 million) and Medstar Health ($18 million).

Since 31 December 2020, it has announced wins with US-based Intermountain Healthcare ($40 million), a leading Californian academic health system ($31 million) and the US FDA’s approval for its breast imaging algorithm.

The company reported that its EBIT margin (EBIT explained) increased again to 59%, which is impressive in my opinion.

Pro Medius reported that its underlying profit before tax grew by 25.9% to $18.76 million. Net profit only increased by 12.4% due to the tax expense rising from $2.76 million to $4.66 million because of share grants and shares vesting for management, with a larger-than-normal difference of the share price.

Pro Medicus balance sheet and dividend

The healthcare business reported that the amount of cash on its balance sheet rose by $7.52 million to $50.93 million. It remains debt free.

That financial strength of the balance sheet allowed the board to increase the interim dividend by 16.6% to $0.07 per share.

Management comments

Pro Medicus CEO Dr Sam Hupert said: “It was a good six months across all jurisdictions . Examination numbers in the first three months of the quarter were still recovering from their April 2020 lows however we were able to make up for the decrease with new clients coming on stream and exam numbers tracking back to pre-COVID-19 levels.”

Growth expectations

Pro Medicus is expecting a large step up in FY22 of exam volumes as many of its announced contract wins come online. The company said that its pipeline is healthy and it’s benefiting from the network effect generated from its growing customer base.

Is Pro Medicus a dog or a delight?

A share price decline of 8% for Pro Medicus is pretty hefty negative reaction. But remember, reporting season is largely just a reflection of the company’s performance against expectations of the market. And this is just one day of movement. Even after the decline, the Pro Medicus share price is still up 74% over the last six months.

If you take the share price out of the equation, I think Pro Medicus is one of the best businesses on the ASX. it has a great balance sheet, a rapidly growing market share, high profit margins and global growth potential. The growing dividend is a helpful bonus.

But, whilst the reported growth was good, the Pro Medicus valuation is enormous. Looking at CommSec earnings projections, it’s valued at 150 times the estimated earnings for the 2021 financial year and 94 times the estimated earnings for the 2023 financial year.

That’s pricey, too expensive for me to want to buy today. But with interest rates so low, and staying low for a long time, you can probably justify paying a much higher price for this quality business compared to most other businesses.

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