Medica Group Plc – Operating with strong cash generation capabilities

Medica Group Plc (LON: MGP) is a Health Care Equipment & Service company providing teleradiology services. The Company presently offers three services to hospital radiology departments, including routine plain film (Routine PF), Routine cross-sectional (Routine CS) and NightHawk.

On 1 April 2021, the Company will release its Annual Report.

Rationale for Valuation – Hold at GBX 132.00

• FY20 profits were in line with expectations, cash generation remained strong in 2020, and it continued to make significant investments. Therefore, it has made good progress.
• Recently, Medica and Integral Diagnostics Limited have established a joint venture, MedX, to expand Medica's market access.
• As per valuation metrics, EV/Sales multiple is currently lower than the Healthcare industry.
• The debt/equity ratio was 0.33x in H1 FY20, lower than the industry median. Hence, the Company is less leveraged as compared to the industry.
• The Company has decent fundamental metrics as it has maintained a Gross margin above 45% for the last three years.
• From the technical standpoint, shares were trading well above the short-term support level of 20-day (around GBX 122.70) simple moving average price, which reflects an uptrend in the stock.

Key Risks

• The Company operates in a strict regulatory environment; any change in regulations or government policies could affect its overall business.
• The performance can be impacted with ongoing Covid-19 challenges, which can disturb the cash collection, operational delivery, and transform consumer behaviour.

Recent News

On 22 February 2021, the Company announced the joint venture with Integral Diagnostics Limited, named MedX. This will provide teleradiology reporting services and increased reporting capacity in Australia, New Zealand, the UK and Ireland.

Trading Update (for the year ended 31 December 2020, as on 21 January 2021)

• FY20 revenue is expected to be £36.8 million, which will be around 21% lower than the previous year. However, the Company expects strong gross margin and profits to be in line with the previous expectations, with adjusted net operating profit margins of approximately 14% for FY20.
• In 2020, the Company saw strong cash generation, with gross cash of £13.9 million and net debt of £4.0 million at 31 December 2020.
• Further, it remains well-positioned to complete Global Diagnostics Ireland's integration as planned by the end of Q1 FY21.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

The Company is establishing MedX in partnership with Integral Diagnostics, which will benefit Medica for a modest investment and expand its geographic reach. At the end of 2020, it had a partnership agreement with Sectra Ltd, which will deliver a new OACS (Picture Archive and Communication System) and expects to go live in Q1 FY22. Despite the lower FY20 financial results, the Company has made good progress with the new strategy and more investment (which underpin long term growth). The Company has a strong liquidity position and is looking to expand geographically with new business lines and selective M&A in the mid to long-term period. Therefore, it remains confident about the long-term growth prospects. The stock made a 52-week low and high of GBX 88.00 and GBX 147.00, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Hold” stance on Medica Group at the current market price of GBX 132.00 (as on 5 March 2021, before the market close at 8:30 AM GMT).

Yourgene Health Plc – Expects a strong H2 momentum

Yourgene Health Plc (LON: YGEN) is a Manchester, United Kingdom-based company, which provides the molecular diagnostics business.

Investment Highlights – Hold at GBX 16.32

• The debt/equity ratio was 0.08x in H1 FY21, lower than the industry median. Hence, the Company is less leveraged as compared to the industry.
• It made a supply agreement with a large US clinical laboratory group and partnership with NPH, which eventually increased the revenue and profit.
• For the next year, the Company expects revenue to be in excess of £25 million.
• In the current financial year, it also expects improvements in profitability, with expanding its geographic reach.
• From the technical standpoint, shares were trading well above the short-term support level of 20-day (around GBX 15.45) simple moving average price, which reflects an uptrend in the stock.

Key Risks

• Moreover, the Brexit uncertainties can lead to trade barriers, shortage of skilled labour supply, and currency volatility.
• The widening demand-supply gap of skilled professionals can have detrimental consequences in 2020 and beyond.

Recent News

On 1 March 2021, the Company stated that Yourgene Health Inc (wholly-owned US subsidiary) had signed a supply agreement with a major strategic partner (large US clinical laboratory Group) for Coastal Genomics' Technology. The agreement was amount around USD 1.5 million over five years to Yourgene.

On 22 February 2021, the Company made a partnership with Newcastle Premier Health Limited (NPH), which will supply Covid-19 PCR testing services to Leeds Bradford Airport.

Trading Update (for the second half of the financial year to 31 March 2021, as on 8 February 2021)

• In H2, it also saw a number of positive developments, with expanded testing capacity in the Manchester facility.
• It expects full-year revenues to be in the range of £18-£20 million, representing solid order growth of 10%-20% (on a year-on-year basis).
• The Company expects significant profitability improvements in FY21 and also expects to be realised in the next financial year.
• Overall, YGEN witnessed stronger trading patterns in H2 FY21 against the H1 FY21.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Conclusion

The Company has entered into the US diagnostics market with a large clinical laboratory Group and is partnering with NPH for the Covid-19 testing service. During this pandemic, the Company expects double-digit revenue growth in the current financial year. Further, it expects to capitalise on several upcoming opportunities, due to expanding capabilities and partners. Meanwhile, H1 FY21 results demonstrated business resilience; however, it supported the UK with its Covid-19 test offerings, which eventually increased the revenue. Therefore, the Board stays confident about the longer-term prospects of the Company. The stock made a 52-week low and high of GBX 7.00 and GBX 24.55, respectively.

Based on the decent growth prospects, we have given a “Hold” stance on Yourgene Health at the current market price of GBX 16.32 (as on 5 March 2021, before the market close at 10:45 AM GMT).

*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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