Company Overview - Capitol Health Limited (Capitol Health) is an Australia-based provider of community-based (non-hospital) medical diagnostic imaging (DI) services to healthcare businesses. The Company provides diagnostic imaging services, through approximately 52 clinics throughout metropolitan and regional Victoria. The services provided by Capitol Health allow clinicians to concentrate on the delivery of clinical services instead of applying their time to the administrative aspects of carrying on a practice. The Company's diagnostic imaging services include X-ray, Magnetic Resonance Imaging (MRI), Ultrasound, Mammography, Doppler, Orthopantomogram (OPG), Echocardiography, Computer tomography (CT), CT Angiography, Cone Beam CT, Nuclear Medicine, Bone Densitomety and Fluoroscopy. The Company also provides its services through its MDI Radiology, which is a provider of community-based diagnostic imaging services in Victoria.
Analysis - Capitol health continues to drive growth through expansions. The group is expanding its NSW radiology services penetration this year by acquiring Eastern Radiology services and Sydney radiology (based in Cremone). Eastern Radiology is a major operation at Bondi Junction, which has two MRI licenses granted by the federal government MRI expansion program. Sydney radiology contributed its high value services to Capitol group.
Interim Results (Source - Company Reports)
These acquisitions has an overall enterprise value of over $30 million and the acquisition is expected to be finished by this month. Post the acquisition, the firm’s NSW division now has high quality radiologists like Dr Ken Sesel, who agreed to work long term with the company. The group also expanded into a high margin specialist capabilities as well as built a huge non-medicare earnings base. Meanwhile, the group’s expansion is New South Wales market is ongoing, and Capitol started the commissioning of a clinical facility at Broken Hill.
Capitol health has been growing rapidly through acquisitions, and delivered a 44.5% revenue surge to $90.3 million during fiscal year ended on June 2014, as compared to $62.5 million in the corresponding period of 2013. A part of the growth was driven by full impact of MDI group, which the company acquired in May 2013. Meanwhile, the firm was successful enough to deliver 12.8% year over year organic growth during the period.
Improving performance (Source: Company Reports)
Capitol Health has built the largest diagnostic imaging (DI) network in Victoria, having over 52 clinics with seven regional Victoria, and is well positioned in the market. This is a consolidated market and other major players include I-MED (EQT) and Primary Healthcare. With regards to the NSW, this is a fragment market with other major players including MED (EQT), Sonic Healthcare, Primary Healthcare, PRP diagnostic imaging. The company is expected to have 14 clinics in NSW after the acquisition in fiscal year 2014.
Focus on MRI market
During 2011/2012, the federal government declared a Diagnostic Imaging Review Reform Package of around $100 million to enhance availability as well as affordability of MRI services in Australia. Capitol health clinics holds seven Medicare-funded MRI licenses of fiscal year 2014, with two licenses from MDI acquisition in 2013. Meanwhile, just ten licenses were granted in Australia through Medicare during 2011/12 and 2016/17. Moreover, the new legislation enabled GPs to refer children under 16 for definite Medicare-funded MRI scans, while some GP-requested MRI products for adults are eligible for Medicare rebates.
DI growth by Modality (Source: Company Reports)
Capitol health has added over five MRI licenses through the acquisition of Southern Radiology group , to its present seven licenses as well as seven unlicensed MRI’s, positioning the firm to target more share in the booming MRI market. The recent acquisition of the Imaging at Olympic park added 2 more MRI licenses to the company. Consequently, the group estimates a revenue growth for the fiscal year of 2015, boosted by higher potential MRI income driven from MRI reforms and new MRI equipment at Hurstville and Miranda. Management expects to further enhance its EBITDA margins driven by higher margin procedures and improve efficiencies.
Improving MRI segment Performance (Source: Company Reports)
Meanwhile, the target industry in which Capitol health operates is estimated to grow double as compared to the overall GDP growth. The expanding ageing population, increasing demand for early detection and prevention medical services, critical services are expected to drive the demand. Moreover, the enhanced accuracy and capabilities of imaging techniques can entice more usage for preferred providers.
Solid First Half Performance
Capitol health performed well during the first half of 2015, posting an increase of 14% to $49.3 million, as compared to $43.3 million. The revenue increase was mainly driven by the increasing market share, organic as well as acquisition growth, and government regulatory changes to MRI referral rights. Management said that the average Medicare benefits payable for diagnostic imaging items across Australia rose by 8% during the period, indicating the group’s solid performance in the sector.
The net profit before tax improved to $7.3 million during the period, witnessing an increase of 69.9% as compared to $4.3 million in first half of 2014. The net profit before tax, post the acquisition costs stood at $6.5 million delivering a 51.2% increase as compared to the corresponding period last year. Consequently the net profit before tax margin improved by 490 bps to 14.9%, before acquisition costs, as compared to 10% in first half of 2014. Meanwhile, the net profit before tax margin rose 320 bps to 13.2%, post-acquisition costs. Accordingly, the group’s net profit after tax (NPAT) surged 53.3% to $4.6 million during the period, as compared to $3 million in the corresponding period of prior year. The successful scalability in the business coupled with improving cost and operational efficiencies helped the firm to post such an outstanding increase of NPAT during the period.
As a result, the earnings per share (includes the 64.7 million shares issued during December 2014 equity raise) rose 41.4% to 0.99 cents as compared to 0.7 cents in the first half of 2014. Capitol health rose its dividends per share (fully franked) by 50% to 0.6 cents, as compared to 0.4 cents in the corresponding period of 2014, indicating the firm’s solid performance, strong funding capacity as well as a firm operational position.
Revenue and NPAT (Source: Company Reports)
The group has further strengthened its balance sheet through a share purchase plan (SPP) and received an amazing response from the investors. Capitol health declared a share purchase plan during January and received an outstanding shareholder response from around 70% of the group’s register. The company raised over $20 million (the company earlier raised over $37.5 million from institutions during December 2014).
Meanwhile, the solid performance of the company led to an increase in the remuneration packages of the firm’s top level management. The professional consultants reviewed the firm’s executive directors remuneration packages. The Managing director will now get a base salary package of $500,000 plus superannuation benefits. The annual short term incentive (STI) will be 30% of the base salary depending on the performance targets. The long term incentive (LTI) will be 60% of the base salary depending on fulfilling certain performance targets. The group’s chief financial officer as well as executive director will get a base salary of $300,000 plus superannuation benefits. The annual STI will be 25% while the LTI will be 40% depending on achieving the performance targets.
Conclusion
The shares of Capitol Health Ltd (ASX: CAJ) generated outstanding returns of 87.5% in the last fifty two weeks, driven by its accretive acquisitions and market expansion. Meanwhile, the stock has been correcting over the last three months, and delivered negative returns of over 24%. However, we view this as a buying opportunity for investors, given the huge potential the company promises driven by accretive acquisitions growth which would consequently boost top line as well as dividends. Management estimates the Southern group’s acquisitions to be accretive by 10% to 15% on a pro forma basis during the fiscal year 2015. Moreover, Capitol group’s booming MRI service revenues and improving penetration would drive the company’s performance.
Capitol Health Daily Chart (Source - Thomson Reuters)
Based on the foregoing, we give a “BUY” recommendation to the stock at the current price of $0.77.
NOTE - THE FOLLOWING REPORT WAS COVERED ON 06/07/2015 UNDER KALKINE DAILY.
Regards,
Team Kalkine
Level 13
167 Macquarie Street
Sydney NSW 2000
E-Mail - [email protected]
Phone - 02 8667 3147
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