BUY HOLD SELL – Integral Diagnostics (ASX: IDX)
Integral Diagnostics (IDX) – Is a leading provider of medical imaging services in Australia and New Zealand. IDX provides state-of-the-art diagnostic services at 72 radiology clinics, including 26 comprehensive sites (which offer a greater suite of services). The business employs some of Australia’s leading radiologists and nuclear medicine specialists.
IDX has quietly moved through the second half of the financial year uninterrupted by negative updates or targeted articles. The next catalyst for the share price will be its full-year results on August 27, 2021.
Its first half numbers back in February revealed solid organic growth which captured a contribution from recent acquisitions in Imaging Queensland and Ascot Radiology. The latter was integrated on September 1, 2020 and is performing in line with expectations. No comment on Imaging Queensland was provided but given its significant contribution to revenue growth, it should not be interpreted as a negative.
What caught the market’s attention was the increase in the average fee per exam, up 2.6%, driven by the move to higher end modalities and Medicare indexation being applied to CT, ultrasound and x-rays from 1 July 2020. The regulation change means that rebates will be indexed at 1.5%, a pivotal move in making radiology for the 9 million Australians who require scans every year more affordable. The market will be keenly watching for any further increase in fees in its results update.
IDX also entered into a joint venture with Medica Group to provide teleradiology services in ANZ, the UK and Ireland, although management said it was not expected to impact earnings in the near term. Priorities in the last few months have been expanding its teleradiology offering via its IDXt and MedX labels, and to identify further acquisition opportunities.
- ROE is healthy at 15.6% and expected to hover around that level for the next two years.
- EPS and revenue growth are expected edge higher; it would be nice to see EPS growth ahead of revenue growth but that does not look likely until FY24.
- It sits on a PE of 26.2x, peers in SHL and RHC sit on 14.8x and 30.9x respectively.
- A gross yield of 3% is below the market average. Not the typical behaviour of a growth focused company, with earnings typically reinvested back into the business.
- 60% of the brokers surveyed by Thomson Reuters have a BUY or STRONG BUY recommendation.
- It is trading at a 1.4% premium to the average broker target price and a 17.5% discount to intrinsic value.
WHAT SORT OF INVESTMENT IS IDX?
IDX is purely a growth play. They are on the acquisition trail, looking to increase their penetration in a market in which they currently sit in fourth place – behind SHL and a few others. IDX has a history of reporting well; in August last year it jumped 17.6% in the week it reported results and in February this year, it firmed ~5% in the week around its half year results. With that in mind, we see the potential for upside risk coming into August.
IDX is also largely influenced by government regulation with changes to Medicare rebates impacting demand. That said, the regulatory environment has been working in IDX’s favour. The recent federal budget brought some good news for radiology services with Medicare rebates for MRI scans to be unfrozen from July next year. Indexation will also be reintroduced to bring patient rebate growth in line with inflation. In simple terms, it means MRIs will now be priced the same as x-ray, ultrasound, mammography and CT scans which were all indexed from July last year. That benefit will be slightly offset by a cut back in the bulk billing incentive but overall, it is a big positive.
As Chris and Ben assessed earlier in the month, there is also the added expectation that growth rates will continue to improve in coming periods, as the covid-impacted months from 2020 are cycled through and Australia catches up to other countries such as Canada and the US, which see a much greater use of MRIs.
IDX is up ~40% since this time last year, outperforming the healthcare sector’s meagre ~5% rise. The lack of news surrounding IDX since its February results has arguably influenced the stocks modest climb higher, adding ~5% in the last few months. The recent performance is reflective of the broader softness in the healthcare sector. Peers in SHL and RHC up ~5% and down 5% for some comparison. A history of running into results and business tailwinds should see it break through resistance at 530c, which would confirm our bullish outlook.
Brokers are bullish, Ord Minnett considers the business well positioned for above-industry growth, citing tailwinds from recent acquisitions. Morgan Stanley say Equal-Weight, mentioning Medicare data which shows diagnostic imaging benefits grew 12.7% from the start of the calendar year. Sees potential for further upside as covid-impacted months are cycled through.
The top two investors in Viburnum Funds and Perennial Value Management sold down some of their holdings in September last year and May this year. Not a confidence inducing move but the share price hasn’t been too bothered.
Negligible short interest.
IDX is a solid performer, capable of delivering above industry average revenue growth, and with a favourable position in the regulatory environment. We expect upside risk to results in August helped by contributions from recent acquisitions and the increase in demand for MRIs and high-speed cardiac CTs. Fundamentals are encouraging and brokers are bullish on the story and the progression so far. Ambitions to expand and develop its teleradiology offering add more weight to the investment case and future growth outlook. We initiated a 1% position to the Growth portfolio on July 1 and would look to add more if it were to break through resistance at 530c.