Broker Upgrades: Whole is greater than the sum, as Jarden urges buying into IDX-CAJ merger

Jarden believes investors should buy into the IDX-CAJ merger, with benefits to flow from MRI deregulation in Australia.

Jarden says things look good for an impending diagnostics stock merger . Picture: Getty Images

The imaging sector is by no means the sexiest part of the healthcare industry, but it plays a crucial role in diagnostics and could present good investment opportunities.

Jarden Research has provided an in-depth analysis of the impending merger between Integral Diagnostics (ASX:IDX) and Capitol Health (ASX:CAJ), highlighting the promising growth prospects for investors if the two firms are combined.

To recap, the $720m-capped IDX revealed in June its plans to merge with Capitol Health (valued at around $400m), forming a diagnostics imaging powerhouse valued at nearly $1 billion.

Integral told investors that the two companies have “highly complementary footprints,” with a combined total of 155 clinics and 350 radiologists.

With unanimous approval from CAJ's board and an independent expert report endorsing the merger as beneficial for shareholders, Jarden sees an increased likelihood of the merger proceeding successfully.

"We merge the two groups' financials and factor in $10 million of synergies, the majority of which should be achieved in FY25," noted Jarden.

The anticipated earnings increase will be largely driven by the deregulation of MRI (magnetic resonance imaging) licenses, a key strategic factor for the merger.

Jarden said this deregulation leads to its revised earnings per share (EPS) estimates for FY25, FY26, and FY27 of -2.2 per cent, +16.3 per cent, and +19.2 per cent, respectively.

IDX upgraded from Overweight to Buy

The merger is expected to provide additional scale and operational leverage.

"Strategically, we view as very positive aspects of the pending merger being additional scale for further operating leverage, capturing a wider referral base, CAJ telehealth opportunities, and an enhanced billing accuracy system."

Following the merger, Jarden has upgraded IDX’s 12-month discounted cash flow (DCF)-based target price to $3.67, versus the current price of $3.08, and has changed its rating to Buy from Overweight.

MRI market expected to expand significantly

The broker believes Australia's MRI landscape provides a significant opportunity for growth, with the country under-serviced compared to peers such as the US.

"Australia ranks relatively poorly as to the number of MRIs per head of population,” said Jarden.

The government is implementing a three-stage deregulation plan starting on July 1 2025 to improve access to fully-funded MRIs.

Jarden believes IDX and CAJ stand to benefit the most from this deregulation, with an expected increase in IDX/CAJ's fully-funded machines by a huge 81 per cent.

Jarden anticipates a revenue opportunity of $14.8 million in FY26 due to the licensing upgrades, translating to approximately $920,000 additional revenue per MRI. The positive impact comes with minimal capital expenditure, primarily necessitating staffing adjustments to meet increased demand.

The broker also sees an additional $13.9 million possible from new MRI acquisitions, resulting in a total revenue upside of $28.7 million.

In terms of competition, while radiology network I-MED may gain a greater number of new full Medicare licences, Jarden said IDX and CAJ were well positioned to benefit from the market dynamics, particularly in metropolitan areas where demand was escalating.