Azure Medical - The cheapest medtech on the Australian market

As a long suffering investor in Azure Healthcare (AZV) and a participant in the 2019 shareholder purchase plan, I have a good understanding of this company.  Pre Covid-19 the company was starting to trade well after reporting a strong 1st half 2020 result accompanied by a robust outlook.  Post Covid (well till early June 2020) the share price has returned to its dismal 7 cent level, with little investor news nor appetite, whilst the rest of the stock market rallies away.  The Australian stock market values software and medical device companies generously and medical software ridiculously however there is little interest is this hardware/software company.

While this company has suffered from corporate governance issues in 2014 and has been through the turmoil relocating its assembly plant from Perth, Australia to Texas, America, the future is brighter on the back of strong product capability and a growing nurse-call market.   It also may be advantageous that AZV is a pure-play nurse-call business against most of its competitors which are conglomerate IT businesses.  Covid-19 may actually result in more money being invested into hospitals and age-care facilities with Azure through the Austco name being one of 6 decent players in this market.

AZV sells nurse call hardware and software to hospitals and aged care providers globally generating ~$30 million in sales, underlying gross profit margins of circa 47%  while washing its face from a profit and free cash flow perspective.  AZV recently raised $3.5 million in new equity capital priced at 6.8 cents with the new monies set aside for increasing the sales force and boosting working capital.  The company had a decent sales pipeline (pre Covid-19, post release of 1H 2020 result) and are hopeful they can reinvigorate their anemic sales growth.  At $20 million market capitalisation, ~$14 million enterprise value and ~$30 million sales I challenge anyone who argues this is not the cheapest medical technology company listed on the ASX.

The US has the most sophisticated and expensive health system and is leading the development of nurse call globally, with Australia a few years behind.  This FDA regulated nurse-call industry was historically built around wired networks and hardware buttons adjacent to hospital beds but today it's about hardware, communications software, wireless environments, workflow and software integrations with electronic medical records (EMR) and real-time locations systems (RTLS).  Nurse call companies that are not innovating with software will not be around in a few years, whereas Azure Medical has been investing circa $3 million AUD per year for the last 5 years into software.

The leading stock exchange listed global players in nurse call include Ascom, Hill-Rom and Rauland (now owned by Ametek).  Azure Medical is the only nurse-call pure-play with these peers being bigger businesses investing in a wider spectrum of healthcare and technology businesses.  The good news here is Ascom trades on an EV/Sales of 1x having reached 3x historically while Hill-Rom trades on 2.9x EV/Sales while Rauland was acquired at 2.2x Sales in 2017.  This compares with AZV which trades at less than 0.5x EV/Sales today.

The investment pitch is AZV trades at below 0.5x enterprise value to sales today is a very significant discount to peers.   It's really the only pure play nurse call company and has been quite successful and targeted with its software spend historically to a point where its key Tacera Pulse product is rated as an industry leading product when it goes head to head vs key competitors.

The AZV EV/Sales comparisons against Australian listed healthcare technology peers like Alcidion, Mach7, Volpara is even more pronounced than the above international names.

AZV generates circa 10% of its revenue from software sources (mostly from one-off software integration licenses today) with say $1 million of this $3 million software revenue from classical recurring software sources (maintenance, subscriptions).  The positive investment angle here is the recurring software component of revenues is growing which has the potential to push gross profit margins over 60% in the medium term.

The optimist in me can see today's ~$30 million revenues grow towards $50 million sales in the next few years.  The combination of credible top line growth (10%- 20%) and improved gross profit margins (+10%) on the back of a higher percentage software sales should rouse investor interest in time.

Successful business execution could see the stock market switch its current EV/Sales valuation multiple less than 0.5x sales currently towards 2x indicating a 25 cent valuation/share price is possible based on 2020 sales and much higher if genuine growth is achieved

Stranger things have happened than a share getting back to what it traded at years ago!

Disclosure: I hold shares.