Medica Group PLC (LON: MGP) – Planning to double the revenue within 5 years.

Medica Group PLC (LON: MGP) is a FTSE All-Share listed Healthcare Company, which is involved in the provision of Teleradiology services. Teleradiology provides transmission of images, such as MRI/CT/X-Ray, from one location to another. The Company offers three primary services to meet demand and supply imbalance in urgent and non-urgent settings - Routine cross-sectional (Routine CS), NightHawk, and Routine plain film (Routine PF). MGP was established in January 2004, and the Company became a listed business in 2017. In 2012, it had achieved ISO 27001 and ISO 9001 certifications. In 2014, it also shifted the head office from Battle to Hastings for growth prospects. Moreover, it has own software development department and has expanded by opening reporting centres globally.

On 14 September 2020, the Company will publish the interim results for the six months ended 30 June 2020.

Key Fundamental Statistics

Industry Outlook Dynamics

As per Grand View Research, the market size for global radiology information system was valued at US$637.9 million in 2018, and it is expected to reach US$1.15 billion by 2026, representing a CAGR of 7.7% between 2018 to 2026. The growth driver includes a rising population, rising number of radiology professionals and practices, increased investments in R&D activities, and preference for web-based solutions. As per the estimate of The Royal College of Radiologists, there will be a shortage of 3,300 qualified radiologists in the UK by 2024, equivalent to over 40% of the current workforce. It can create an opportunity for the Company to expand the capacity and breadth of services.

Growth Prospects and Risk Assessment

MGP has a sustainable business model with a proven track record of decent growth trajectory. It is the leading provider of teleradiology services in the UK. Moreover, it has a strong in-house clinical governance which is constantly evolving to ensure clinical best practices. Financially, the Company is highly cash generative with operating cash conversion of more than 90 percent of EBITDA (FY19). Also, it is a trusted partner to the major client base since over 85% of FY19 revenue was derived from customers who had been with the Company for more than two years. Furthermore, through the combination of diversification into allied areas and continued leadership in UK teleradiology services, it aims to double revenue over the period 2020 to 2025.

(Source: Company Website)

However, the growth trajectory can be impacted by various factors. There is an operational risk from inaccurate reporting or clinical quality. The long-term growth is dependent on the ability to grow reporting capacity in line with client demand. Also, cyber-attack or data loss could expose to litigation, commercial, financial, and reputational damage. Moreover, there is a technical risk of inability to leverage the power of artificial intelligence, to compete effectively in the marketplace. Also, the Company operates in a highly regulated landscape, and failure to comply could lead to a significant financial or reputational loss. 

Segment Analysis

It has three primary services lines - Routine Cross-Sectional, Routine Plain Film and NightHawk. Geographically, it generates revenue from only one geographic area, the UK.

 (Source: Presentation, Company Website)

Synopsis of Recent Developments

1 June 2020: The Company issued 168,536 ordinary shares to satisfy awards and options vesting in the Deferred Bonus Plan 2017.

23 March 2020: It announced a strategic partnership with Qure.ai, to develop AI tools for improving the efficiency of radiology scan workload.

Non-Financial Key Performing Indicators

Over the years, the Company has been improving the reported patient numbers and reducing the average turnaround time, which reflects operational improvements.

(Source: Annual Report, Company Website)

Key Shareholders

Trading Update (H1 FY2020)

Led by the impact of the COVID-19 pandemic on radiology reporting activity, the Company expects revenue level to be around £17.0 million in H1 FY20 (H1 FY19: £22.0 million). The Company’s cash position remains robust, with a cash balance of £20 million at 30 June 2020 (31 December 2019: £16.5 million).

Regarding the announcement on 20 May 2020, the Company witnessed an improvement in reporting activity and returned to profitability in June 2020. Moreover, it has not furloughed any staff and not required any government funding during the COVID-19 period. For NightHawk, the Company's out-of-hours service, reporting activity has returned to approximately 95% of the level experienced prior to the COVID-19 mayhem. Further, Medica's routine (elective) reporting has started to surge progressively.

Operational and Financial Highlights (FY2019 ended 31 December 2019)

(Source: Company Website)

• The Company has delivered a strong financial position to support long-term growth, with an increase in revenue of 19.4%, adjusted operating profit of 5.9% and a net profit of 7.4%.
• Revenue growth has been driven by an increase in the number of NightHawk and routine Cross-Sectional (CS) and Plain Film (PF; x-ray) scans.
• Adjusted earnings per share increased by 4.9% year-on-year to 8.13 pence, reflecting the growth in the business.
• The business continued to generate strong cash flow, with cash flow from operating activities of £9.7 million and capital expenditure of £2.8 million. Further, MGP has made an investment in Storage Area Network (SAN) of £1.3 million, which provides a more flexible approach to data storage in such a fast-growth business.
• At the end of 2019, Medica achieved net cash of £4.6 million (cash of £16.6 million) and a loan of £12 million, with a £1 million revolving credit facility (RCF) and £12 million term loan facility.
• The Company has a strong balance sheet and is well-placed to continue to deliver high-quality service to support the NHS during this time of unprecedented pressure on healthcare resources.

Financial Ratios – Strong Profitability Margins versus the Industry Median

Reported profitability metrics for the financial year 2019 were higher against the industry median, reflecting higher revenue generated and better control over expenses as compared to the industry. Medica Group Plc has delivered a substantial return for the shareholders’ as return on equity of 23.9% was higher as compared to the industry median of 7.3%. On the liquidity front, Medica Group Plc’s current ratio was higher than the industry median of 1.03, reflecting sufficient liquidity to meet short-term obligations and shows a robust liquidity profile to tackle the uncertainty due to COVID-19 outbreak. On leverage front, the debt-equity ratio was 0.35x, which was lower as compared to the industry median of 0.96x, reflecting that the Company is less leveraged as compared to the industry.

Share Price Performance Analysis

Daily Chart as on 27 August 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On 27 August 2020, at the time of writing (before the market close, at 10:45 AM GMT+1), Medica Group Plc shares were trading at GBX 136.82, up by 0.60% against the previous day closing price. Stock 52-week High was GBX 168.50 and Low of GBX 88.00, respectively.

Bullish Technical Indicators

From the technical standpoint, the shares were trading above the short-term support level of 50, 100 and 200-day simple moving average price. Also, 14-day RSI is currently in an oversold zone, which means there is a good potential for a short term rebound in the stock price. MACD line is placed above the central line, indicating a bullish setup. The Company’s stock has delivered a positive return of around 9.46% in the last one year.

Medica Group Plc Vs FTSE All-Share Index (1 Year)

(Source: Refinitiv, Thomson Reuters)

In the last one year, Medica Group Plc share price has delivered 11.69% returns as compared to negative 13.37% returns of FTSE All-Share index, which shows that the stock has outperformed the index during the last year.

Valuation Methodology

EV/Sales Approach (NTM) 

To compare Medica Group Plc with peers, EV/Sales multiple has been used. The peers are Horizon  Discovery Group Plc (EV/NTM Sales was 3.10x), Advanced Oncotherapy Plc (EV/NTM Sales was 5.88x), Integrated Diagnostics Holdings Plc (EV/NTM Sales was 3.75x), and EuKedos SpA (EV/NTM Sales was 3.05x). The Average of EV/NTM Sales of the Company’s peers was 3.95x (approx.).

Business Outlook

In FY20, the Company plans to deliver robust organic growth in core business with enhanced scalability and increased operating leverage. It also has upside potential with selective merger & acquisitions, and from new business lines. However, the Covid-19 pandemic can cause short term uncertainty on reporting capacity and activity. Meanwhile, Medica has been taking advantage of lower workload to initiate an operational excellence programme and accelerate training for implementation of new clinical protocols to enhance quality. The long-term focus is to double the revenue within five years, whilst delivering new processes and systems to generate operating leverage.

Adjacently, Medica can take advantage of the shortage of qualified radiologists in the UK by 2024, by expanding the length and breadth of capabilities to sustain the leadership position.

The stock price of the Company has yielded a positive return of 11.70% in the past 1 year, whereas the benchmark index, FTSE All-Share has given a negative return of 13.49% in the same period.

(Source: Presentation, Company Website) 

Medica Group Plc witnessed a CAGR growth of ~20.27% in revenue over the period FY15 to FY19, while net profit (from continued & discontinued operations) recorded a stellar CAGR growth of ~47.09% during the same period.

Considering the strong operating & financial performance, high level of cash generation capabilities, decent profitability margins, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Medica Group at the current price of GBX 136.82 (as on 27 August 2020, before the market close at 10:45 AM GMT+1), with lower-double digit upside potential based on 3.95x EV/NTM Sales (approx.) on FY20E Sales (approx.).

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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