Pro Medicus: New Contract Tracking Our Unchanged Expectations

We raise our fair value estimate for narrow-moat Pro Medicus PME by 3% to AUD 34.50. Roughly two-thirds of our upgrade was due to the stronger U.S. dollar relative to the Australian dollar and the remainder is due to the time value of money.

Shares in Pro Medicus remain materially overvalued and we suspect the market is likely underestimating competitive pressures. EBIT margin in fiscal 2023 was maintained at 67%. We expect any further margin upside to be limited given the research and development spending required to stay competitive long-term and forecast a midcycle 71% EBIT margin by fiscal 2033.

In addition, its main product, Visage 7, resonates most with U.S. academic hospitals that typically have large endowments and greater interest in advanced visualizations. While Pro Medicus is starting to demonstrate that smaller radiology groups are willing to pay a premium for its technology, we still anticipate wider uptake to be slow. We also expect downward pressure on the average size of future contracts as the more lucrative academic hospitals market inches closer to saturation.

Pro Medicus announced a contract win with South Shore Health, or SSH, for a total committed minimum value of AUD 16 million over eight years. Our constant-currency earnings estimates are unchanged as we had assumed further contract wins would contribute to earnings growth from fiscal 2024.

SSH is the largest independent health system in Southeastern Massachusetts and has clinical affiliations at academic and cancer centers across Massachusetts that also use Visage 7. Planning for the rollout is commencing immediately based on Pro Medicus’ proven cloud-based implementation process and we assume a six-month earnings contribution in fiscal 2024, making up less than 1% of our total fiscal 2024 revenue forecast of AUD 168 million.