Integral Diagnostics Limited

 
Company Overview: Integral Diagnostics Limited (ASX: IDX) is an Australian healthcare services company, which is involved in delivering Diagnostic Imaging Services to general practitioners, patients, medical specialists and allied health professionals. The business operates across Australia, New Zealand, Victoria and Queensland. IDX’s integrated network provides effective and accurate communication, enabling medicine specialiststo gain access to images from everywhere and anywhere. The Company offers state-of-the-art diagnostic services to patients and their referrers at ~64 radiology clinics, comprising 20 hospital sites.

IDX Details

 
Higher Investments & Synergies from Acquisitions are Key Catalysts: Integral Diagnostics Limited (ASX: IDX) is involved in the provision of diagnostic imaging services across Australia and New Zealand. The company offers essential dependable and focused service, which is required to meet the increasing needs of customers. As a leading healthcare provider, the company remains dedicated to assist all its employees, patients and shareholders, in the present situation of the COVID-19 pandemic. In doing so, the company is offering optimal quality diagnostic imaging and patient care. As the Coronavirus situation continues to escalate, IDX will follow the policies of the Australian and NZ government, to focus on the health and safety of its employees and patients.
 
For the six months ended 31^st December 2019, IDX’s operating revenue came in at $131.8 million, soaring 15.3% year over year. As a result of the application of AASB 16, the company’s operating EBITDA for the period rose ~29.6% year over year. The results delivered progress on the back of both organic growth across all business units and through acquisitions synergies. The average fee per exam for the period went up ~1.3%, owing to continuous shift to higher end modalities.
 
Notably, the company acquired Imaging Queensland Group (IQ) in November 2019. IQ is one of the top providers of diagnostic imaging. The move is in line with IDX’s strategy to enhance the operating performance and well-being of its patients and employees.
 
The company continues to focus on cost control measures, while investing to support its growth outlook. The company has completed an entity wide cultural survey in order to recognise strengths and to select areas of improvement. Further, the company’s effort to focus on social and governance programs to assess its carbon footprint and other sustainability improvement schemes is a key positive area. Higher investments in scientific research and innovative technologies including cyber security and the privacy of patient data will help in providing improved patient experience and care.
 
Due to organic activities and acquisition synergies in international markets, the company has boosted its overall growth. Furthermore, the company’s strong development in new sites, investment in new equipment and four months’ contribution from Imaging Queensland remain key catalysts. The company declared an interim dividend of 5.5 cents per share (fully franked), which increased 10% on pcp. The below picture portrays the dividend performance over the period covering FY16 – 1HFY20.
 

Historical Dividend Trend (Source: Company Reports)
 
Revenue Up ~15.3% in 1HFY20: During the period, revenue stood at $131.8 million, rising 15.3% year over year, whereas operating EBITDA increased ~29.6% year over year. Operating EBITDA margin for the period stood at 26.3%, up from 23.4% reported in the prior corresponding period. Operating NPAT for the period stood at $14.4 million, up increase 11.6% year over year. The ramp-up stage of North Melbourne Specialist and Research Centre was another key milestone in 1HFY20. Further, IDX remains on track to undertake major refurbishments at the John Flynn Hospital on the Gold Coast and St John of God Hospital in Ballarat, which adds to the positives. Notably, in 1HFY20, organic Australian revenue increased from $102.1 million reported in 1HFY19 to $109 million in 1HFY20. Contribution of revenue from New Zealand was $13.1 million in 1HFY20. In 1HFY20, employee costs increased by 1.3% as a percentage of revenue, propelled by higher wages and higher investment in Radiologists’ remuneration structures.


1HFY20 Key Highlights (Source: Company Reports)
 
Strong Balance Sheet to Aid Growth & Future Acquisitions: As on 31^st December 2019, the company reported cash and cash equivalents of $26.8 million. The company’s net debt at the end of 1HFY20 stood at $134.8 million. The weighted average cost of capital persists to decrease and net debt/LTM EBITDA ratio as at 31 December 2019 stood at 1.8x, lower than 2.2x in 1HFY19. Net assets at the end of the period stood at $225.6 million, up by $98.4 million as at 30 June 2019. Free cash in 1HFY20 came in at $25.1 million, up from $23.9 million in 1HFY19.
 
Key Developments: The company saw rising positive momentum throughout 1HFY20. IDX finished the refurbishment program of John Flynn Hospital on the Gold Coast, which comprised a privately installed Digital PET scan along with a Cardiac CT. It also remains on track to invest in Radiologists and is dedicated on its social and governance programs to confirm continuous progress and best practice. The company also took initiatives to implement FDA/TGA approved and successfully tested selective artificial intelligence software to aid workflow and focus on patient care. The momentum is expected to continue and will aid in retaining the existing customer base and maintaining a dominant growth impetus in the coming years.
 
COVID-19 Impact: We note that the novel coronavirus has been shaking most of the companies and disrupting global economic activities. In such a scenario, IDX continues to aggressively monitor the impact of COVID-19 on its operations, with upmost priority being on the health and safety of the company’s employees, patients and the community. The company finds it too early to detect the full impact of COVID-19. However, IDX stated that with the government regulations regarding the use of medical and hospital resources, diagnostic imaging volumes are likely to get impacted for the time period. In this difficult time, the company remains on track to work with public and private healthcare providers and the industry, to ensure proper care of its patients and staff.
 
Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 42.61% of the total shareholding. Viburnum Funds Pty Ltd is the entity holding maximum shares in the company at 9.68%. Perennial Value Management Ltd. is the second-largest shareholder, with a holding of 8.31%.
 

Top Ten Shareholders (Source: Thomson Reuters)
 
Key Metrics:  In 1HFY20, the company had a gross margin and EBITDA margin of 95.6% and 31.9%, which is higher than the industry median of 36.7% and 10.8%, respectively, representing decent fundamentals. Net margin for 1HFY20 stood at 8.2%, higher than the industry median of 3.3%.
 

Key Metrics (Source: Thomson Reuters)
 
Outlook: The global economy is seeing a bloodbath amid the COVID-19-conducted worldwide sales disorder. However, one sector that is witnessing industry-wide growth is the healthcare sector. With rising knowledge about the advantages of expert medical caregiving, the necessity for healthcare workforce or employees has increased substantially. These companies are involved in developing future approaches by executing digitalisation of their organisation. Furthermore, the increasing aged demographics have played a significant role in improving the spending of the healthcare industry. IDX stands to benefit from its planned approaches for considering numerous growth opportunities in a very active healthcare sector.
 
Notably, the company remains on track to increase its existing business, margins, sales team as well as Australia & New Zealand team with a full suite of products and strategic acquisitions. Additionally, IDX is driving its organic growth, business integration and targeting to achieve future productivity gains by leveraging hub & spoke model. The company is also working towards costs minimisation and optimizing work, with the addition of Imaging Queensland. IDX’s effort for R&D and product improvement will improve productivity and aid diagnosis and early detection of diseases. The company’s balanced approach with respect to growth coupled with the expansion of its existing portfolio reflects its progress towards sustainable future growth.
 
Artificial intelligence has also been a thriving achievement in healthcare. IDX’s plan to grow its product portfolio and enhance its AI execution through the latest technology advancement will improve and enhance patient outcomes on a global basis. 

Key Valuation Metrics (Source: Thomson Reuters)
 
Valuation Methodology: EV/EBITDA Based Relative Valuation 


EV/EBITDA Based Relative Valuation Approach (Source: Thomson Reuters) 
 
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months 

Stock Recommendation: The stock of the company is currently trading below the average of its 52-week trading range of $1.780 - $4.390. The stock has a market capitalisation of ~$484.42 million. In 1HFY20, the company delivered a robust result, driven by increased investment in new technology as well as growth in its business segments along with synergies from acquisitions. The stock has corrected ~32.34% and ~18.89% in the last three months and six months, respectively. Considering the above factors, we have valued the stock using a relative valuation method, i.e., EV/EBITDA multiple, and arrived at a target price of lower double-digit growth (in % terms). For this purpose, we have considered peers such as Capitol Health Ltd (ASX: CAJ), Virtus Health Ltd (ASX: VRT), Monash IVF Group Ltd (ASX: MVF), Healius Ltd (ASX: HLS), etc. Hence, we recommend a “Buy” rating on the stock at the current market price of $2.60, up 4.418% on 8th April 2020. 

 
IDX Daily Technical Chart (Source: Thomson Reuters)

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