Fund Investment #4: Monash IVF (Invest in Life!)

After the previous post about LIFE, what better investment to be bringing into the Fund than Monash IVF (MVF).

‘Invest in Life’ is the headline of MVF’s 2017 annual report and most recent shareholder presentation in November 2017. And just like our First Fund investment Virtus Health, that’s exactly what they do.

But talk about an industry being out of favour! Virtus and Monash IVF are the two leading ‘Fertility solutions’ businesses in Australia, and the share prices of both have suffered in recent times.

The key numbers from an investment perspective are surprisingly similar to Virtus, so I’ll only highlight those briefly further below. Instead, let’s spend a little time understanding the business itself…

Monash IVF

Whilst Virtus is technically Number 1 with a market share of around 36%, Monash is not far behind – and has another claim to fame:

“We’ve been helping create families since 1973 when we achieved the world’s first IVF pregnancy. We’re proud of our science, and we’re proud that every 2.5 hours a Monash baby is welcomed into the world”

The company is not without its issues at the moment though – which of course is when these great opportunities to buy often present themselves. During 2017, Monash IVF lost one of its key doctors (perhaps even its Number 1 Doctor), Dr Lynn Burmeister, who is likely to take a few patients away from the business. Her non-compete agreement expires in 2019, when any impact will most likely be felt. But is one of the leading IVF businesses in Australia that reliant on one single doctor, when there are over 100 other fertility specialists in the business?

But this isn’t the biggest challenge investors seem to be worried about. The rise of ‘low-cost’ IVF providers, particularly Primary health Care, seems to be spooking some shareholders…

The Big Issue

A big question many people are asking is whether the increase in low-cost offerings by Primary Health Care are stealing potential clients away, or whether they are opening up a new market for potential new parents who just couldn’t afford the $15,000 or more required.

Monash IVF doesn’t offer a low cost alternative. They dabbled in this strategy not long ago, but have quickly revered back to being a ‘Premium Provider’ with a Focus on the Fanciest technology and service.

I’m betting that there will always be a place for premium providers. I’ve never been personally involved in the IVF process, but when it comes to the birth of your child, money is often the last thing you care about. For such a priceless opportunity, many people are willing to pay for the best.

On top of that, there will always be more complex infertility issues that require more expensive care.

Despite this, there’s still a risk of continuing downward pressure on the pricing of these services…

Efficiency Improvements

Prices for treatment could continue to fall, but Monash still has potential to improve its profitability through greater efficiencies.

One of the key value drivers of the business is ‘Cycles per Specialist’. Monash currently averages around 100 fresh cycles per specialist, but Virtus is up at nearly 150. That definitely indicates some room for improvement.

The demand for IVF treatment has been growing, and there’s no reason why that shouldn’t continue, with more and more families delaying children whilst they maximise their career and financial potential.

Premium Offering = Premium Investment Price?

It doesn’t appear so in this case. Here’s a quick snapshot of the figures:

Three of the directors of the Company seem to agree the shares are good value, having topped up their own shareholdings in late November 2017.

Despite the compelling value and long-term prospects of the business, I’m only contributing $3,163 at this stage (2,500 shares at $1.265 – thanks to yesterday’s nice little market dip!), given the already large holding in Virtus. We need to allow some room for a little diversity in the Fund after all!

There might be more issues in the short term with the stock price, but like raising children, we’re in it for the long haul.

Financial investments certainly can’t bring as much joy as children do, but I’m certainly hoping these two IVF stocks turn out to be big, strong, healthy, investments many years from now.

8 Comments

  1. Haha, we hold all these except PGF.

    Just a question about position sizing – how are you deciding this? Do you have, say, twice as much conviction in Virtus as you do with Monash?

    I usually approach stocks as equal weight first up and then add if the value proposition seems even better due to company performance or price etc then perhaps add extra.

    • Frankie

      I promise I haven’t hacked into your brokerage account to steal all your ideas… let’s see if #5 is one of yours too! (how many stocks do you own?)

      Good question about position sizing. With a $50k fund to start with, I was aiming to focus on around 7 or 8 good investments, so around $6k to $7k each, which was where I started with Virtus. I was very happy with the price for Virtus, so it was an easy, one time decision. For Telstra, I wanted to allow room to buy more if it fell, as I wasn’t convinced it wouldn’t get cheaper (I’d probably buy more if it slipped into the $3.20’s), so went ‘half-in’. PFG is a much smaller business, so I wanted to start a little smaller for that holding – especially since it had been volatile recently.

      And I would love to have put a full $6k or so into Monash IVF at this price, but I don’t want to be over-exposed to the Australian IVF industry – at least until I start adding more cash to the Fund to grow it. And if I had to pick between the two, I’d lean towards Virtus.

      So no real hard and fast rules on position sizing – I guess you could say its a little bit of science, and a little bit of gut feel…

      • Haha was starting to wonder. We’ll see how the next few pan out!

        Thanks for the insight.

        Will you be posting performance yearly vs the index? Tracking it via Sharesight or something?

        We hold 15-20 stocks in our personal portfolio, alongside our 5-10 LICs. In our super, we hold more individual stocks and some international index funds.

        • Frankie

          Yes will definitely be posting regular performance updates vs my friend Indexing Ian, probably every quarter, but not with any fancy software – sticking with the good old fashion spreadsheets!

    • Frankie

      Thanks Tom – I feel the same way perusing yours and other blogs learning about stocks in the Canadian and US markets. Who knows, maybe the Fully Franked Fund will branch out into the global markets one day…

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