Medica (LON:MGP) is a small cap Healthcare company that ticks a lot of boxes if you’re looking for your next high quality long term hold. Think repeat revenues, strong cash generation, a solid track record of profitable growth, and encouraging underlying market dynamics. There are some concerns, as well - as there are with any other stock - but overall the medium term prospects look good here.

Medica has clearly qualified for other peoples’ screens as well: it made the cut for the 2020 NAPS as a top QM candidate, and it was also in the top 20 picks in our 2020 Stock Picking competition (you can find a list of the top picks in this PDF).

It also qualifies for a screen I recently set up that aims to identify stocks with long term compounding potential. You can read more about the rationale for that screen here but to cut a long story short, it is looking for high margins and returns on capital over multiple years, with a QM Rank of 75 acting as a basic cut off.

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Medica Group was established in January 2004. In 2007, Nuffield Health acquired half of the Group, then John Graham led a management buyout in May 2013. In March 2017, it listed on the London Stock Exchange, raising gross proceeds of £15m, which were used to pay down net debt to approximately £10m.

It has so far generated excellent operating margins and returns on capital. The big question is can it protect them?

What does Medica do?

Medica Group is the market leader by revenue in the provision of Teleradiology services to the NHS. It connects its network of off-site teleradiologists (who review and report on medical scans) to hospitals that then act on those findings. It does this via a bespoke IT platform.

The company currently offers three primary services to hospital radiology departments:

  • NightHawk - an out of hours emergency reporting service,
  • Routine cross-sectional (Routine CS) - covering a combination of routine CT and MRI scans (both forms of cross-sectional scan), and
  • Routine plain film (Routine PF) - covering plain film images.

Of these departments, Nighthawk is the biggest and most profitable division because it provides higher value out of hours emergency scans in less than sixty minutes. The “Routine” divisions assist hospitals in managing their day-to-day…

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