Fully-Franked Fund Investment #1: Virtus Health (VRT)

The honour of the First Fully Franked Investment in Frankie’s Fund goes to Virtus Health (VRT), with an investment of around $7,000.

Yesterday its shares closed as a price of $5.12 (11 January 2018). Virtus listed on the ASX around 4 ½ years ago, and only for very brief periods during that time has the price ever been this low.

I’ve bought 1,375 shares based on this price for a total cost of $7,040.

Now, price is one thing, but what we really care about is Value! We’ll take a quick look at a few key figures, including value, but first, some very brief background…

What does Virtus do?

Virtus focuses on Assisted Reproductive Services (ARS) – i.e. helping people who are struggling to have babies. It has around 46 fertility clinics in Australia, which makes it the biggest player in Australia, but has also started branching out in Ireland, Singapore and Denmark.

There’s plenty more to be said about the business and the industry it operates in, but I’ll keep the Focus on the Figures for now.

The Key Stats

There are plenty of statistics we could look at, but here’s Four that Frankie likes to Focus on:


Let’s touch briefly on each of these:

1) Dividend

A Fully-Franked dividend yield of 7.0% is pretty sweet. What makes it even better though is that it’s coming from a company that is fantastic at producing cash, and has a good history of paying dividends.

There’s been some ups and downs for Virtus in the past few years since listing, which is simply the nature of the IVF or ARS industry, but despite this, they’ve managed to keep paying out a great, Fully-Franked dividend.

Being a market leader in an industry that’s sure to grow as more and more people seek IVF treatments means there’s great potential for these dividends to just keep on growing.

2) Value

As I’ve said, we don’t want to pay any old price just to get our hands on those dividends – we want to get a bargain if we can! And for me, this is a fantastic price to buy a piece of Virtus.

It’s Price / Earnings (P/E) ratio, one way to measure value, is just a tick over 13x based on last years earnings. This is lower than it’s been over its entire history on average each year since listing.

Another value measure, the Enterprise Value to EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation), is currently around 8x, compared with around 9.4x at listing date. And as you can see from the share price chart, these valuations after listing increased pretty significantly, nearly another 50%!

To me, this looks like great value for a market leading IVF company, which has some great growth prospects. The current price seems to be overly focused on the volatile short term.

So we seem to be getting those juicy dividends for a pretty good price on an earnings basis! But what about the assets we’re effectively buying a piece of? What does Virtus actually own?

3) Assets

Pretty much all of the assets we’re getting with this company are intangible. There’s $411 million already recorded on its balance sheet, which is almost all ‘goodwill’. And based on the total value of its shares (with a price of $5.12 per share), the market is pricing in another $144 million of intangible value, for a total of $555 million today.

So there’s nothing really ‘tangible’ that we own. Should that make us nervous?

Intangible assets are really hard to value. But they are real. And what we can look at is how these intangible assets values have changed over time.

Have the values of these intangible assets really dropped that much over time, rather than grown? The Virtus Health brand, network of clinics, processes, relationships, intellectual property, growth potential and a whole host of other intangible assets?

I’m more than happy to pay this price for all of these fantastic intangible assets that Virtus owns and has created.

4) Debt

Borrowing more money than you can handle is one of the easiest ways for the value of a company to disappear. Some companies use debt well, and can comfortably service the repayments, but others are very vulnerable to a downturn in the market.

Virtus does have some debt, around $154 million (or $127 million net of cash), which isn’t that much compared with the market value of its equity of $412 million. But what’s more is that Virtus is fantastic at generating free cash flow, which is the critical factor in how easily it can repay its debt. So nothing to lose sleep over here.

In Summary….

  • Great dividends with a Fully-Franked yield of 7.0%
  • A market leading business in an industry that should keep on growing
  • Good value at a P/E of around 13x, which doesn’t seem to be pricing in much growth at all

A Fantastic First addition to the Fully-Franked Fund, and very happy for the opportunity to buy shares at this price.

Here’s hoping a few others on my list provide similar opportunities to buy in over the coming weeks…