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.
Main Observations:
BROKER STUFF
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.
TOP INVESTORS
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.
SHORTING
Negligible short interest.
CONCLUSION
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- 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.
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