MoneyTalks: Goldman recommends these two ASX stocks in booming diagnostic imaging space
Goldman Sachs has been looking into this pair of ASX diagnostics imaging specialists – and likes what it sees.
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Goldman Sachs has Buy recommendations on two diagnostics imaging specialists Capitol Health (ASX:CAJ) and Integral Diagnostics (ASX:IDX).
For Capitol Health, Goldman has a 12-month target price of 33c (v current market price of 28c), while for Integral, the target price is $3.70 (v current price of $3.45).
Goldman believes both companies are well positioned in a structurally attractive market where there is a rapidly increasing ageing population, prevalence of chronic disease, and growth in healthcare expenditure.
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The recent 2023-24 federal budget is also set to give the sector a boost, with $5.7 billion in funding earmarked over five years to strengthen Medicare and improve accessibility to doctors in regional areas.
The broker says the fragmented nature of the radiology industry (top six players account for only 57 per cent of revenues) provides opportunities for consolidation, given the scale benefits and potential revenue and cost synergies.
Another tailwind for the sector is that there is an increasing use of MRI (magnetic resonance imaging), CT (computed tomography) and PET (positron emission tomography) imaging services in Australia.
Latest OECD data shows that the proportion of MRI and CT scans as a percentage of total volumes has increased from 37 per cent in 2010, to 45 per cent today.
According to GS, there is more space for growth, as Australia’s MRI utilisation is still below other developed countries.
“We believe that Australia’s MRI usage should over time move towards France’s, which is currently more than two times that of Australia, given that both countries have a similar level of equipment per capita.”
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What exactly is diagnostic imaging?
Diagnostic imaging refers to the field of medicine that uses non-invasive techniques to produce images of the human body for clinical analysis and medical intervention.
These images are produced using a range of modalities, including:
MRI, CT, X-ray (diagnostic), nuclear medicine (including PET) and ultrasound.
They aid doctors in diagnosing and deciding on the appropriate treatment for patients. In addition, doctors can use diagnostic imaging to monitor how the patient’s body is responding to treatment.
The size of the Australian addressable market has experienced steady, consistent growth over the last 10 years.
Per Medicare data, total annual expenditure on radiology has increased from $3 billion in FY12, to $4.9 billion in FY22, representing a CAGR of 5.2 per cent.
This is consistent with the growth in annual healthcare expenditure in Australia in the past decade (CAGR of 5.5 per cent).
“In our view, diagnostic imaging volumes have a number of structural long-term drivers such as increasing ageing population, increasing incidence of chronic disease that underpin long-term demand for services,” said GS.
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Investment thesis for CAJ and IDX
CAJ is metropolitan focused, and operates 67 sites across Australia, with most primarily concentrated towards Victoria, accounting for three quarters of total number of sites.
CAJ is the sixth-largest player in the country, and is a low-cost community-based provider of radiology, which underpins its stable, and defensive cash flows that are 77 per cent government backed.
Goldman believes revenues that are majority government backed are resilient, which can provide the backbone for future investments and growth.
“CAJ also has a healthy balance sheet provides flexibility, and we believe its seven-times NTM EBITDA multiple is attractive on a growth-adjusted basis,” said Goldman.
IDX, on the other hand, is more regionally focused, and operates 89 sites with a majority of sites located between Queensland (46 per cent), Victoria (25 per cent) and New Zealand (22 per cent).
IDX also derives around 15 per cent of revenue from teleradiology, which provides services to both internal and external clients.
Recent initiatives, such as the MRI deregulation for Australian regional and remote areas in 2022, have increased the accessibility of these services to a broader population.
“IDX is currently the cheapest stock across our coverage on a growth-adjusted,” said Goldman.
This content first appeared on stockhead.com.au
The views, information, or opinions expressed in the interview in this article are solely those of the interviewee and do not represent the views of Stockhead. Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.
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Originally published as MoneyTalks: Goldman recommends these two ASX stocks in booming diagnostic imaging space
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