Notes On The FY 2023 Pro Medicus (ASX: PME) Annual General Meeting

This morning Pro Medicus (ASX: PME) convened its FY 2023 Annual General Meeting, which commendably was streamed virtually allowing all shareholders to attend.

The commentary was fairly positive this year with Chairman Peter Kempen announcing that FY 2024 is already shaping up to be another successful year even on a constant currency basis. He also paused to reflect on the generally beneficial strengthening of the US dollar. As a reminder, in FY 2023 Pro Medicus achieved free cash flow of $55.8 million in FY 2023, which represented an impressive 92% conversion of net profit.

My favourite two questions were from friends who have held Pro Medicus shares just as long as I have.

One friend elicited the tidbit from CEO Sam Hupert that “Renewal negotiations are closed door just with us about term and price. They would like the 5-years-ago-price, but we negotiate something higher;” and that Pro Medicus has “100% renewal at this point”.

The other asked the same question about AI I had asked and received the confirmation that there are three potential advantages for the AI capability on Visage. First, to include AI features as part of the existing subscription in order to stay ahead of the competition and achieve a higher price. Second, to charge per transaction (in the case where Pro Medicus itself owns the algorithm, such as its breast density algorithm). And third (added by the Chairman) the possibility to offer third part AI algorithms on the platform (yet to occur). My guess would be the third part is super long term and there’s some risk that analyst expectations around the timing of revenue from AI could be disappointed in the future.

Probably the key point from the presentation this year was that the company has established a strong presence in both academic medical centres and Integrated Delivery Networks (IDNs), often replacing outdated systems with their more advanced, scalable solutions. They estimate they have just 7% of the addressable market in the USA. They estimate about 80% is potentially a good fit for Visage.

Based on their assessment of the market size, I think Pro Medicus is very likely to (eventually) grow its revenue at least 5x from FY 2023.

While there is no doubt that the high P/E ratio of around 135 implies immense growth for Pro Medicus, if profit increases by 5x from here then the P/E ratio would be 27. Assuming that a company will 5x its profit (and then keep growing beyond that) is obviously quite optimistic. And the longer it takes to 5x from here, the higher we will need the P/E ratio to be to justify holding the stock.

Despite the optimism in the price, I have already sold too many Pro Medicus shares so I am happy enough to just continue to white knuckle ride out the old “high P/E ratio” situation with my remaining holding. After all, P/E ratios are just a tool to understand market expectations; there is no rule that a high P/E is bad.

The final theme worth mentioning from the AGM is that the people who work for Pro Medicus remain biggest asset of the company. I would say one potential risk for the company is churn at the board and management level (and also amongst technical employees). Surprisingly, almost 20% of the Pro Medicus shares were voted against the remuneration report. This seems pretty bizarre given the strong performance of management over the years. The Chairman expressed a keenness to engage with institutions to understand why they had voted against it. No shareholders spoke against the remuneration report at the AGM.

Personally I am much more concerned about losing key management personnel than them being paid too much. I voted in favour of the remuneration report.

Disclosure: the author of this article owns shares in PME and will not trade shares in PME for at least 2 days following the publication of this article. Please keep in mind the author may buy or sell shares after this date. This article is not intended to form the basis of an investment decision and is not a recommendation. Any statements that are advice under the law are general advice only. The author has not considered your investment objectives or personal situation. Any advice is authorised by Claude Walker (AR 1297632), Authorised Representative of Equity Story Pty Ltd (ABN 94 127 714 998) (AFSL 343937).

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