The Pro Medicus Limited (ASX: PME) share price is trading more than 7% higher this morning after the company announced an on-market share buyback. The buyback will permit the company to acquire up to 10% of ordinary shares on issue during the last 12 months.
Pro Medicus is a healthcare imaging IT provider which provides a range of radiology software to hospitals, imaging centres, and health care groups. The company has listed the reason for the buyback as 'capital management'. The buyback will commence on 1 April 2020 and last until 31 March 2021.
Previous buyback
Pro Medicus previously ran an on-market share buyback from 2 April 2019. That buyback has now been finalised with the company purchasing 34,062 shares for total consideration of $842,972.03. Shares were purchased for between $24.18 and $25.70.
Why conduct a buyback?
The effect of a buyback is to reduce the number of outstanding shares on the market, which increases the ownership stake of remaining shareholders.
Companies may choose to undertake a buyback because it believes the market has discounted its shares too deeply, to invest in itself, or to improve financial ratios. The announcement of a buyback can cause the share price to shoot up because it is seen as a positive signal.
Pro Medicus shares were trading at $18.29 at close of market Friday, well down from a high of $27.30 in February and below the price at which the company bought shares in its previous buyback. The company may believe its shares are currently undervalued which would provide motivation for the current buyback.
Solid first-half results
Pro Medicus released strong first-half results last month which saw revenues up 15.7% to $29.3 million. Solid growth was recorded in key jurisdictions of Australia, Europe, and North America.
Transaction revenue grew by 30% compared to the previous six month period. This revenue is recurring rather than one-off so provides a good base for growth in the second half and future periods. Pro Medicus was also able to grow its cash reserves by 20.2% to $38.8 million.
Underlying profit before tax grew 45.3% to $14.8 million while net profit after tax climbed 32.7% to $12.1 million. A fully franked interim dividend of 6 cents per share was declared, up 71.4%.
Foolish takeaway
Pro Medicus' share buyback is a vote of confidence in the company in a market where most companies are doing everything they can to preserve cash.
