Acquisitions and shift to MRI Market to drive growth: Capitol Health Ltd (ASX: CAJ) delivered an outstanding revenue increase of 23% year on year (yoy) to $111.2 million for the fiscal year of 2015, driven by better market share, organic growth, and synergies from Sydney radiology (based in Cremone) and Imaging Olympic park acquisitions. CAJ also finished Southern radiology and Eastern Radiology acquisitions during April and July months respectively. The acquisition of the Liverpool Diagnostics is the latest feather in the cap. Accordingly, CAJ’s underlying net profit before tax soared 59% yoy to $16.2 million, driven by the better operational efficiencies and enhanced business scalability.
Revenue Profile (Source: Company Reports)
NPBT margin surged by 325 basis points to 14.5% in FY15, from 11.3% in FY14, indicating the group’s operating leverage. Government’s favor towards MRI market players, growing ageing population, acquisition synergies and CAJ’s focus on sub specialty radiology would drive its growth in the coming periods. CAJ stock corrected over 42.3% in the last six months (as of Sep 25), opening a bargain investment opportunity to the market. Having a modest dividend yield of 2.1%, we suggest a “BUY” on CAJ at the current stock price of $0.585.
CAJ Daily Chart (Source: Thomson Reuters)
Medibank Private
Maintaining Competitive margins against peers while delivering solid results: Medibank Private Ltd.’s (ASX:MPL) Health Insurance premium revenue rose 5.1% yoy to $5,934.8 million during the year, while the segment’s operating profit surged 33.8% yoy to $329.3 million in FY15, which is well above the prospectus estimates. Medibank’s net operating margin improved by 120 basis points to 5.5%, from 4.4% in fiscal year of 2014 better than prospectus forecast of 4.9%, boosted by savings in management expenses and better health benefit claims management. We believe medibank is on track to further improve its margins and enhance its operating base. The group also reported a Statutory Group net profit after tax (NPAT) of $285.3 million for the fiscal year of 2015, as compared to $130.8 million in fiscal year of 2014. Pro forma Group NPAT rose 13.0% above the prospectus forecast to $291.8 million. Medibank’s stock rallied over 6.6% in last four weeks alone. Moreover, Medibank issued a positive outlook, and estimates a Premium revenue growth of more than 5.5% in FY16.
Health Insurance Operating Profit Margin (Source: Company Reports)
The company has raised the premiums by an average of 6.6% across its brands in FY15, which can bring profit growth. MPL estimates to further enhance its management expense ratio to 8.3% for FY16 and achieve less than 8.0% of MER during FY17. The group targets a better health Insurance operating profit of > $370 million for the fiscal year of 2016. We believe strong fundamentals of Medibank would drive the stock higher in the coming months, and recommend a “BUY” at the current stock price of $2.38.
MPL Daily Chart (Source: Thomson Reuters)
Greencross Limited
Expanding addressable market would offset management changes: Greencross Limited (ASX: GXL) shares have been under pressure in the last four weeks and fell over 7.4%, impacted by the group’s Chief Executive Officer (CEO), Jeffrey David’s resignation. Meanwhile, Martin Nicholas, the group’s present Chief Financial Officer (CFO) was substituted for CEO of Greencross. On the other hand, Greencross business is performing well and was able to increase the size of its business by 6x from FY13 to FY15, driven by the Mammoth merger and City Farmers acquisition. The group improved its retail loyalty membership by 25% yoy to more than 2.9 million members while the Healthy Pets Plus membership surged by 43% yoy to >43,000 members during FY15. Moreover, Greencross customers spend 5x more time at GXL stores which offers retail, vet and grooming services as compared to customers who shop only at its retail stores and 2x more time than customers who use only Greencross vet. Accordingly, the firm is targeting these three growth platforms, to achieve its target to boost the market share from 8% (with 332 outlets) to 20%.
Activity and Tactic (Source: Company Reports)
The group is in line to achieve growth through co-locate stores. Moreover, Greencross also reported a like-for-like sales (LFL) rise of 6.2% in the YTD of 2016 fiscal year, addressing the investors’ concerns on its organic growth. We believe that investors have recently overreacted on management change news, and need to use the recent correction as an opportunity to enter the stock. Based on the foregoing, we recommend a “BUY” on GXL at the current price of $6.53.
GXL Daily Report (Source: Thomson Reuters)
Healthscope Ltd
Improving admissions for hospitals and enhancing international pathology segment would underpin the growth: Healthscope Ltd’s (ASX: HSO) hospitals segment contributes over 81% of the overall group’s EBITDA for FY15, and the segment’s revenue rose 5.7% yoy to $1,852.5 million, driven by the organic admission growth while brownfields impact was less. Over 23 new beds were opened since past two years, and the group did not open any new beds in the second half of 2015. Overall international pathology (accounts 15% of the overall EBITDA) revenues surged 8.5% yoy to $243.2 million partly driven by the New Zealand and Singapore operations growth.
Dividends (Source: Company Reports)
The group’s focus on operating leverage paid off as the international pathology segment’s EBITDA surged by 13.7% yoy to $60 million in FY15, while EBITDA margin improved by 120 basis points to 24.7%. Healthscope built a strong pipeline of hospital expansion projects which would generate over 980 new beds and 50 new theatres by the end of 2018. HSO plans to start some major capital projects like Gold Coast, Knox, and National Capital by the second half of Fiscal year 2016, leading to a further growth from FY17. Moreover, the group continues to be the major hospital player to deliver quality and accreditation, and got 8% “Met with Merit” accreditation ratings from ACHS during the fiscal year, which is four times better as compared to the industry average of 2%. The stock increased over 3.1% (as of Sep 25) in the last four weeks. We remain bullish on the stock at the current price of $2.62.
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