Medical imaging provider Integral Diagnostics Limited’s (ASX: IDX) has not let the pandemic stop its acquisition driven growth model. Indeed, its share price rose sharply last week after announcing its acquisition of NZ’s Ascot Radiology. The share price initially jumped 14.6% to $4.24 on Wednesday before moderating back to $4 yesterday at close.
Ascot Radiology is a group of 22 diagnostic imaging centres in Auckland. Its acquisition is accretive in terms of earnings per share, with the NZ business adding a projected A$5.3m to $A6.1m in annual revenue to the Integral Diagnostics group.
Arguably the acquisition announcement eclipsed the company’s Covid-19 business update, also announced on Wednesday morning. Integral Diagnostics reported falls in revenue across its imaging centres of 24% to 50% in April and 5% to 16% in May, with some sites closed entirely due to reduced demand. The reduction was attributed to the pause on elective surgery in the early stages of the pandemic, as well as the cancellation of sports leading to less injuries.
The initial purchase price of NZ$50m is 8.3x the midpoint of projected EBITDA, “normalised for one-off impacts of COVID19”, estimated at NZ$5.6m to NZ$6.4m. Further payments are applicable based on future performance. This compares unfavourably to a larger acquisition last year of Imaging Queensland, which cost 8x EBITDA before earn outs.
Way back in 2016, the company was able to buy smaller practices for under 6 times EBITDA, so it seems clear that the prices of these businesses have been creeping up over time. That means the acquisition model is becoming less attractive.
The company had net debt of $134 million when it last reported, and a half year profit of just under $11 million, meaning it can easily cover interest payments. However, its market cap is now approaching $800m at over 35x annual earnings, arguably a high price to pay for a modest growth business.
Having said that, Integral’s considerable market cap means it can fund further acquisitions by issuing shares, and its current trading range puts it on around 16 to 20 times EBITDA. That means its acquisition arbitrage growth model can still work, at least in theory.
At the end of the day, though, we’d be looking at the dividend yield when considering a company like this. The current trailing yield of about 2.6% doesn’t look impressive, but given the long term resilience of the medical imaging industry, we can see why people would buy the stock on a more favourable yield during a sell-off. Integral Diagnostics was trading on a trailing yield of over 5.2% at its lows in March.
While this is an interesting stock to follow, it isn’t a high growth one.
Christian Tym does not own shares in Integral Diagnostics Limited.
This post is not financial advice, and you should click here to read our detailed disclaimer.
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