Our three most overvalued ASX shares
These three companies are trading at a significant premium to our fair value.
Within our coverage universe the following three shares have the highest price to fair value which represents the most overpriced shares according to our analysts.
Pro Medicus Ltd (ASX: PME)
Business strategy and outlook
Pro Medicus’ strategy revolves around renewing existing contracts and winning new clients for its main product, Visage 7, while increasing its price point. The company won six out of six major public tenders it competed for in fiscal 2021, which often involved on-site pilot tests. While this likely highlights Visage 7’s current superior speed, scalability, and resilience, continued investment in research and development is imperative for the firm to remain at the forefront of innovation and consistently win contracts. Most of the firm’s expenses are allocated to over 40 software engineers with the main R&D center located in Berlin. The company also recently extended its R&D capability in New York in collaboration with NYU Langone Health in 2021. Its R&D efforts mostly revolve around software enhancements, program extensions, and research in artificial intelligence to assist in diagnoses.
Many of Pro Medicus’ competitors already utilize server-side rendering and cloud-native architecture. Legacy systems are also mostly owned by larger competitors such as GE Healthcare, Fujifilm, and Philips, which will be incentivized by the high returns in the industry. In Australia, Sectra won an AUD 85 million 13-year deal over Pro Medicus with NSW Health for both its Radiology Information System and Picture Archiving Communications System in 2020.
Visage 7 has found most success with US academic hospitals and in fiscal 2022 was in nine out of the top 20 ranked US hospitals, more than double its nearest competitor. While Pro Medicus has secured a few contracts with midmarket US hospitals such as Allegheny and Wellspan, wider uptake has been slow, with Visage 7’s features likely superfluous for their normal operations. However, Pro Medicus is still targeting smaller radiology groups that seek to consolidate IT infrastructure and become more efficient.
Currently, Visage 7 is limited to radiology departments, but Pro Medicus is aiming to extend the product set to other specialty departments, including cardiology and ophthalmology. In addition, when winning contracts, the firm has other product offerings, such as Open Archive or Visage RIS, that it can cross-sell to clients.
Our valuation
Our fair value estimate is $52 per share. This implies a forward fiscal year price/ earnings ratio of 35 and an enterprise value/ EBITDA ratio of 24. We forecast a five-year group revenue compound annual growth rate of 15%, which is largely driven by our revenue assumptions for Visage 7 in the US, which contributed 90% of fiscal 2025 group revenue.
We forecast segment revenue to grow at a five-year CAGR of 16%, resulting in 93% of group revenue stemming from the US by fiscal 2030. In the region, we assume Pro Medicus can win five major contracts per year on average versus its typical historical average of three major contract wins per year. We expect this is likely, as it extends the product set to other specialty departments outside of radiology, such as cardiology. We also assume average contracted revenue per year, which is volume-based, grows by a 4% CAGR. This is made up of 0.75% volume growth due to population and aging demographic factors, 2.75% due to volume growth per capita as adoption of radiology exams increases, and 0.5% average price growth per exam.
We expect EBIT margin to average 76% during the next five years, up from 74% in fiscal 2025. Pro Medicus has great cost control as it manages its own R&D and marketing, which make up the bulk of expenses, and contracts allow the company to pass through installation, training, and support costs to customers. We expect low levels of capital expenditure to persist and forecast an average of $11 million in spending per year. Our estimates deliver a forecast five-year EPS CAGR of 16%.
Objective Corp Ltd (ASX: OCL)
Business strategy and outlook
We expect Objective’s strategy to focus on investing heavily to continue expanding its product portfolio, both organically and inorganically. Over the past decade, Objective invested heavily to adapt its core enterprise content management software suite to evolving customer needs, especially around the transition to the cloud and remote working.
We view these trends as maturing and we don’t see other trends requiring a similar magnitude of investment on the horizon. As such, we believe Objective will increasingly have capacity to deploy capital into more industry-specific applications of ECM, such as for assessing building development applications and compiling new regulations. We view the expansion into planning and building most favorably, with Objective’s products already commanding dominant market shares in Australia and New Zealand, both of which have outsize construction sectors.
Our valuation
Our fair value estimate for Objective is $7.30 per share, implying a price/ earnings ratio of 23 and dividend yield of 2.5% based on our fiscal 2026 estimates.
We use a weighted average cost of capital of 7.5%, reflecting low revenue cyclicality, medium operating leverage, and low credit risk. We assume revenue to grow modestly over the next decade, at a CAGR of 6%, as the transition toward a recurring revenue model has now mostly completed and the global trend toward reducing government waste, reduces growth.
We expect EBIT margins to decline to 27% in fiscal 2035 from 31% in fiscal 2024, which is primarily driven by an increased rate of capitalization of research and development expenditure feeding through to amortization.
JB Hi Fi Ltd (ASX: JBH)
Business strategy and outlook
JB Hi-Fi is one of Australia’s largest retailers, having built a strong brand and market leadership in the consumer electronics industry after the demise of smaller players and, more recently, major competitor Dick Smith Electronics. Australians have been quick to adopt the latest technology during the past decade, thanks largely to high employment and low interest rates.
Competitive advantage comes from JB Hi-Fi’s low-cost business model, similar to listed US peer Best Buy. Price deflation and intense competition are longer-term risks. Stores typically break even in just less than a year, with mature stores on average contributing over $20 million in sales. The business doesn’t run warehouses and holds all stock at the store level, minimizing storage and transport costs; The Good Guys’ big and bulky goods distribution centers are transitioned into group home delivery centers. The business model requires high turnover and foot traffic to compensate for low operating margins on consumer electronics, home appliances, and software. Despite this, we still don’t think the business carries an economic moat.
Consumer electronics are commoditized products, and technology keeps converging. JB Hi-Fi needs to offer appealing incentives to attract mobile phone customers, given the highly fragmented market. Consumer electronics margins will also be affected by price deflation resulting from intense competition. Management openly advertises that its employees are incentivized and can often sell at cost to close a deal, sacrificing gross margin.
Our valuation
Our fair value estimate of $45.50 is based on the expectation that JB Hi-Fi will maintain its share of consumers switching to e-commerce.
This estimate implies forward fiscal 2026 price/ earnings of 10 and an enterprise value/ adjusted EBITDA of 5. We expect solid revenue growth in fiscal 2026 as consumer wallets are supported by real income growth per capita.
Nevertheless, we expect pretax margins to return to long-term maintainable levels of around 6% because of competition driving gross margins lower. Over the next five years, we expect sales to grow at a compound annual growth rate of 4% and pretax margins to average 6%.
