Over the past five years teleradiology services company Medica (MGP:AIM) has more than doubled sales and profit yet the shares are trading roughly where they were in March 2018.

The shares have derated from over 30 times earnings per share to the current 18.5-times. It might be tempting to conclude that growth potential has diminished, but that isn’t the case.

Numis analysts estimate sales and operating profit could grow by a compound annual growth rate of 16% and 17% respectively between 2021 and 2024.

The shares trade on a 2023 estimated free cash flow yield of 5.8% according to Numis’ estimates and the company remains in a net cash position.

Shares believes there is good potential for double digit shareholder returns over the next few years driven by the fundamentals of the business.

In addition, if the shares continue to languish, they may attract takeover interest. Strategic Equity Capital (SEC) fund manager Ken Wotton told Shares that Medica trades at a big discount to the takeover valuations of previous deals in the sector.

Fundamentally there continues to be a big gap between the demand and supply of qualified radiologists which creates an opportunity for Medica.

In a full year trading update (17 January) the company said it had seen a strong recovery in radiologist reporting capacity from September 2022 onwards.

The UK business (70% of revenues) experienced a robust recovery in elective procedures and notched-up net new contract wins and extensions of service agreements as the NHS deals with exceptional patient demand.

The company’s after-hours Nighthawk services business achieved double digit sales growth in 2022 and is well placed to deliver future growth.

Over the last year 65% of contracts have been renewed and with an average contract length of three to five years coupled with new contract wins, momentum remains positive.

Businesses outside the UK which include Medica Ireland and US company RadMD both experienced strong growth in 2022 driven by increased contract wins. Medica Ireland saw a significant increase in the number of new out-of-hours teleradiology hospital clients.

Numis continues to see opportunity for Medica to leverage its brand and network to increase its range of telemedicine services as well as expanding into new geographies.

Medica acquired RadMD in early 2021 and it has since demonstrated significant sales growth and developed a more diversified order book including new pharmaceutical and biotechnology companies.

Furthermore, it continues to evaluate strategic acquisition opportunities to expand the scale and therapeutic focus of its clinical trials imaging business. 

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