Pro Medicus: Massive New Contract Win but Shares Remain Expensive

We raise our fair value estimate for narrow-moat Pro Medicus PME by 8% to AUD 33.50. The majority of our upgrade was due to an uplift in Pro Medicus’ contracted revenue following a significant contract win and roughly 25% due to a stronger U.S. dollar.

Pro Medicus announced a contract win with Baylor Scott & White Health, or BSWH, for a committed minimum value of AUD 140 million over 10 years. This is by far the biggest contract Pro Medicus has signed, over three times as big as its previous largest contract. BSWH is one of the largest not-for-profit healthcare systems in the United States. and Pro Medicus’ first major client in Texas. It joins the impressive list of academic hospitals the firm has as clients. 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 5% of our total fiscal 2024 revenue forecast of AUD 166 million.

However, 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 size of future contracts as the more lucrative academic hospitals market inches closer to saturation. We think it is unlikely that future contract wins will be comparable in size to BSWH.