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Morningstar | Medicare IVF Data Muted, but Our Long-Term Volume Assumptions Are Unchanged for Monash

We maintain our AUD 1.60 fair value estimate for no-moat-rated Monash IVF Group following the most recent release of Medicare IVF fresh and frozen volume data (Medicare items 13200, 13201, 13202, 13218) for May 2018. Total fresh and frozen cycle volumes at a national level, on a combined 12-month rolling basis, increased by 2.8% and thus came in broadly in line with our volume growth assumptions for the industry.

Despite the near-term challenges in Victoria, which we see continuing into the second half of fiscal 2018, our long-term volume growth outlook is unchanged. We project average 3% annual growth in domestic fresh IVF volumes over the next five years, at a group level for Monash IVF Group. This is based on both the group's target demographic segment of Australian women aged between 25 and 54, and population projections for women aged 31, the current median age of new mothers in Australia.

Our long-term pricing assumptions also remain unchanged at around 2%, given the company’s focus on the premium service end of the market and where we believe the company has a differentiated offering. We therefore consider shares in Monash IVF to be undervalued, given that they are trading at a significant discount to our intrinsic assessment, albeit with a high fair value uncertainty. As such, we think the market is extrapolating problems faced and accounted for in Victoria due to the departure of a key fertility specialist on the volume side, which we previously adjusted for at first-half 2018, and softness in South Australia due to increased competitive pressures as having a longer-term pricing impact. However, at current levels the shares imply a pricing decline of around 5% over the next five years, which we view as overly focused on the near-term challenges.

Monash IVF is expected to report fiscal 2018 results on Aug. 27. We forecast earnings of around AUD 23 million, broadly in line with consensus forecasts. Our five-year CAGR for net income is 2.7%.