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Medica is on a high quality growth path
The new management team at teleradiology specialist Medica (MGP:AIM) have reinvigorated the business and energetically executed a clear growth path to diversify revenues and enhance earnings quality. Investors should buy into this story.
Meanwhile, in the core teleradiology business, Covid-19 has caused a huge backlog in elective procedures and images. This pent up demand will almost double the shortage of NHS radiologists which in turn will drive growth in the outsourced radiology services that Medica provides.
According to analysts at Liberum the company’s out of hours Nighthawk service, which is exclusive to Medica, and its Elective business will grow by a combined 14% a year out to 2025.
Including contributions from recent acquisitions, Liberum reckons Medica could grow earnings at a compound annual growth rate of 22% a year to 2025 which is not reflected in the shares which trade at a 35% discount to peers.
We believe the growth prospects for the business aren’t fully appreciated by investors and expect the discount to peers to narrow.
BENEFITS OF SCALE NOT APPRECIATED
Medica’s nationwide network of consultant radiologists perform outsourced interpretation of MRI and CT scans under contract for the NHS and private hospitals.
As the largest player in the outsourced market, Medica offers scale and efficiency that other firms find hard to match which improves reliability and attractiveness to the NHS, creating a virtuous circle.
It also makes Medica more attractive from the perspective of independent radiologists because the firm can offer higher visibility of work and an unrivalled national footprint.
A new operating system should create greater productivity for radiologists and more granular 3D imaging to improve accuracy to the NHS.
IMPROVING EARNINGS QUALITY
The diversification strategy has quickly taken shape. In late 2020 Medica purchased market leader Global Diagnostics Ireland which as well as providing traditional radiology services also generates eye-based health scanning revenues.
In February the company signed a joint venture with Integral Diagnostics which operates in the Australian and New Zealand markets. The deal will allow both companies to offer NightHawk services to each other at lower cost to take advantage of the time difference.
The company’s latest move was the proposed £16.1 million acquisition of US based RadMD which specialises in the imaging contract research business. This market is valued at around $1 billion, some three-times larger than the UK radiology market.
RadMD operates a high-quality platform and achieves around 90% repeat business while it is growing fast with an order book worth four times 2020 revenues.
A strong rebound in UK elective procedures and increasing international exposure lays the foundation for growth and better-quality earnings, which are less reliant on the NHS.