This morning medical imaging software business Pro Medicus Limited (ASX: PME) reported a net profit of $19.1 million on revenue of $50.1 million for the financial year ending June 30, 2019. The profit and revenue are up 92% and 48% respectively over the prior fiscal year. When adjusting for currency gains and new accounting standards net profit came in at $22.7 million, up 83%.
Using the adjusted net profit of $22.7 million we can see that this software-as-a-service business is operating on sky high net profit margins of 45.3%, which you'll be hard pushed to find anywhere else on the S&P/ ASX200 (ASX: XJO).
The company will pay a final dividend of 4.5 cents per share to take total dividends to 10.5 cents per share including special dividends. But, it won't impress your parents with a 0.3% yield based on a $29 share price.
Diluted earnings per share came in at 18.32 cents to mean the stock trades on 158x FY 2019's earnings or 59x sales based on 103.4 million shares on issue and a $29 share price to give a market value of $2.998 billion.
This kind of valuation has caused value investors to label the stock a 'bubble' recently. However, it's the attractive economics, recurring revenues, scalability and strong outlook of this business that means investors prize it so highly.
For example today it flagged it has $180 million of contracted revenue locked in already over the next 5 years with a full sales pipeline and multiple other opportunities to grow revenue from existing and new customers. It also has the opportunity to lift its already sky high profit margins.
Finally it should be noted that high profit margins are the calling card of a high-quality or market-leading tech and healthcare business that has 'pricing power' as another investment characteristic.
When you add in a strong balance sheet with $32 million cash in hand and a founder running the business for more than 25 years you can see why it's highly valued.
A conventional 158x PE may seem ridiculous, but if it can keep doubling profits that falls to 40x in FY 2021 for a business already profitable, paying dividends, and positioned to keep growing.
A compound doubling of profits out to FY 2021 may be too bullish, but is useful as an example in helping understand the market's valuation.
Others I'd suggest investors take a close look at include Altium Limited (ASX: ALU) and Xero Limited (ASX: XRO).
