As the only specialised diagnostic imaging company listed on the ASX, Capitol is enjoying excellent growth conditions in a market estimated to be $3 billion in size, and growing at about 5% a year.
Victorian-based specialised diagnostic imaging (DI) company Capitol Health (CAJ) has been an outstanding performer on the Australian Securities Exchange (ASX) in recent years. In the last five years, Capitol Health has generated a total return (capital growth plus dividends) of 70% a year. Over three years, that return has been 180% a year. Although the rate of return has slowed in the last 12 months, that is to a still-stellar 36%.
That is because the company is in the right place at the right time. As the only specialised DI company listed on the ASX, Capitol is enjoying excellent growth conditions in a market estimated to be $3 billion in size, and growing at about 5% a year, driven by demographics (expanding and ageing population), a shift in healthcare focus to early detection and prevention of conditions and the improving accuracy and capabilities of imaging techniques.
Not only that, Capitol has the federal government in its corner too, as Canberra seeks to improve the affordability and nationwide access to Medicare-funded magnetic resonance imaging (MRI) scans. In 2011 the government announced it would implement the $104 million Diagnostic Imaging Review Reform Package over a five-year timeframe, commencing from 1 July 2011 until 30 June 2016, to improve the quality and value of affordable diagnostic imaging services across Australia, and access to them.
Prior to the reform package, none of the MRI services offered at Capitol’s five clinics were eligible for Medicare benefits: patients had to cover the full cost of services.
The 2014 financial year saw the second tranche of MRI reforms coming into operation. Four new General Practitioner (GP)-requested MRI items for adults (patients aged over 16 years) were introduced onto the Medicare Benefits Schedule (MBS) on 1 November 2013. GPs are responsible for approximately 70% of all diagnostic imaging referrals across Australia, but many MRI scans required a referral from a specialist or consultant physician. By expanding GP requesting rights for MRI scans, these services became more accessible.
The four items introduced to Medicare in November 2013 covered about half the specialist-referred MRI scans undertaken nationwide. The new changes prompted a surge in use of MRI services, which have doubled as a proportion of Capitol’s total revenue. The company says the increase has been driven entirely from its target market of GP referrals. Capitol now has seven Medicare-funded MRI clinics and by the end of 2015 it will have installed an additional seven “unfunded” MRIs – four are already in place – to enable a more effective allocation of rebated and non-rebated scans across its network.
Capitol also offers CT (computed tomography) scanning, X-ray and ultrasound services. The company currently has 52 clinics in Victoria and expects to start acquiring clinics in other states within the next 12 months.
The government opening up access to Medicare-funded MRI services has increased the patient base, and that has had a tangible effect on Capitol’s top and bottom-line. For the year ended 30 June 2014, Capitol Health lifted revenue by 44% to $90.3 million, while net profit doubled, to $3.6 million.
A final dividend of 0.5 cents a share took the full year payout to 0.9 cents a share, fully franked, up 64% on FY13.
Acquisitions have also helped. In April 2013, Capitol Health bought MDI Group, a specialist diagnostic imaging company, with 11 clinics mainly located in Melbourne’s south-eastern suburbs.
The company is already seeing changes in government funding to MRI services driving a shift in customer demand towards MRI and away from CT scans. Radiology providers without MRI capabilities will come under increasing market-share pressure, while an operator like Capitol Health strengthens its position. The licences represent both a barrier to competition and a significant, tangible asset.
However, all is not plain sailing on the regulatory front. Under the current government’s proposed GP co-payment package, scheduled to come into effect in July 2015, rebates for X-rays, MRI scans and ultrasounds will be reduced from 95% to 85% for patients who were previously bulk-billed.
Capitol says it has been anticipating the introduction of co-payments and alterations to rebates for some time, and has made the necessary strategic plans to capitalise on this and other market trends – in particular the growth in MRI driven by regulatory changes that took effect in November 2013.
“We expect this to continue and increase especially from November/December 2014 when the last of the 5 recent (unlicensed) MRIs on order are scheduled to be installed,” says managing director John Conidi. Our market-leading low cost structure and best-in-class IT systems will enable us to effectively manage the proposed changes to bulk billing.” Conidi says the acquisition of MDI as a co-payment operator has Capitol well-positioned to respond to changes in the market.
Technology is also changing the industry, and Capitol Health has bitten the bullet on large investments to retain its market status. As expected, a big chunk of this investment has been on the imaging side – unavoidable when MRI machines cost well over one million dollars and a CT scanner costs half this. Capitol has significantly upgraded its CT machines to low (radiation) dose machines, and upgraded the non-ionising radiation methods of MRI and ultrasound. But Capitol has also undertaken a heavy investment in IT, particularly in broadband, such that all its sites are connected by its own fibre-optic network: this enables results almost in real-time.
The company’s information system records all patient data – not just details such as date of birth, but also archives all images taken in a standardised format across all sites. Capitol retains the data indefinitely with the objective of fostering loyalty, encouraging the patient to choose our clinics should they require imaging in the future. Capitol sees the world of “big data” as an enabler to better utilise its knowledge, to better service its patients: because it cannot strike contracts with referrers, or use volume discounts, Capitol lives and dies on its service levels.
Capitalised at $272 million, Capitol has – not surprisingly – been pushed by its excellent performance to a share price level that is difficult to see as good value, at least in the short term. At 63 cents, the stock is trading above its analysts’ consensus price target of 59 cents. In FY15 Capitol is expected to earn 2.12 cents a share in FY15, up 26%, and pay a dividend of 1.14 cents, placing it on a forecast price/earnings (P/E) ratio of 29.7 times earnings and a fully franked prospective dividend yield of 1.8%. But growth is the reason for buying this stock: it has a highly scalable business, and is looking to expand out of its Victorian stronghold. That is the true opportunity for Capitol Health.
