SIF Folio: Is Medica the investing medicine I need?

23rd Jul '19 by Roland Head

10 comments 3116 reads

I’m pretty excited this week. I’ve got a completely new company to look at. The business in question operates in a defensive sector where the SIF fund is seriously underweight - healthcare.

I should point out that Medica (LON:MGP) floated on the LSE Main Market in 2017, so has been around for a while. But this £140m company is not one I’ve looked at before. Prior to writing this article, my knowledge of the business was limited to Graham Neary’s March 2019 SCVR report, covering Medica’s 2018 results.

I suspect some of you will have taken an interest in this company already, so please feel free to share your insights in the comments below.

What does Medica do?

Medica’s business is in ‘teleradiology’. Essentially, it provides an outsourced pool of radiologists who work remotely for the NHS, reporting on scans such as MRI, x-ray and CT scans. The group’s revenue is divided into three reportable segments:

Nighthawk (50% revenue): emergency out-of-hours service, 24/7 response in under 60 minutes
Routine cross-sectional scan reporting (38% of revenue): supplementing or enhancing in-house radiology expertise for CT and MRI scans
Routine plain film (10% of revenue): Less urgent x-ray reports (I think!).
Specialist services: revenue isn’t yet being reported for this segment, but Medica appears keen to develop expertise in areas such as specialist MRI and CT scans, nuclear medicine and DXA reporting.

The business appears to be enjoying structural growth tailwinds as NHS Trusts are faced with “growing demand for diagnostic reporting, limited in-house capacity and ongoing financial constraints”.

Medica only serves UK hospitals at the moment. According to the firm’s website, it works with more than 80 NHS Trusts. The group generated revenue of £39m in 2018, during which it reported on 1.66m “body parts”. That’s an average of £23.50 per body part, which doesn’t seem a huge amount -- I guess many routine reports must be very quick to complete.

At the end of February, the company had 375 consultants on its books. These work through an IT system that gives them access to patient records. Medica undertakes to ensure that the scan workstations used by consultants are equivalent to those they’d use in an NHS hospital.

Historically, the consultants retained by Medica were all practicing UK-qualified consultant radiologists with at least two years’ NHS experience in this role. However, the company is beginning a process of…

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Carey Blunt

23rd Jul '19

Interesting stock, thanks for bringing it to our attention as I was not previously aware of it.

DavidHathway

Looks like the type of stock I would go for.

Thank you for all the info.

DWit199

What would be the consequence of a Corbyn government to outsourcing companies such as Medica?

Roland Head

Hi DWit199,

It's very hard to guess just how widely or quickly a Corbyn government might carry out its threat to renationalise operations that once belonged in the public sector.

I suspect this kind of small operation might stay under the radar for quite a while, essentially as a supplier to the NHS. That's my guess, anyway.

Regards,

Roland

andrea34

In their last results Medica (LON:MGP) state that "...Medica has deployed radiologists in Australia and New Zealand and will shortly start reporting. The company expects to develop this increased capacity further under the same Clinical framework that has operated so successfully in the UK. This is the start of the internationalisation of the business and is an important development in Medica becoming a global company." so it looks to be breaking beyond the UK.

Vsihv

I hold and am a fan of Medica (LON:MGP) - quality and growth at a reasonbale price.
It was not when I bought it and I think it is sadly one of those IPOs where short term growth was extrapolated and quickly disappointed the market when that growth didn't continue and I dare say people have forgotten about it since.
I have looked at it several times and am very tempted to add - ideally if it had a better yield - I find investing against charts a lot more palatable when paid to wait / compound.
Management is a risk - it was (and still is) a highly networked and heavyweight management team (and I expect in addition to the growth at time of IPO, was one of the factors to support a premium rating) and this is a risk.

One of the key challenges that impeded growth was recruiting radiologists, so using other countries mitigates (and I am not sure why they could not use radiologists from India / Pakistan / Argentina) who I am sure are just as qualified but less well remunerated.
At the current valuation, I think it would be reasonable to say international expansion is gravy for the quality of the company.

Re plain film - I think that is the old school bog standard X-Ray, which is far lower margins. From memory, I think they said that they were diverting work to X Sectional and NightHawk when they had a shortage of radiologist due to higher margin, so those margins might come back down to the 20% range.

Also, I can't resist with this one - my apologies - but it is a big part of the reason I hold.
Every hospital needs an on call radiologist. In the event of a call, they will leave home and spend 45 minutes to and from work.
While travelling, they cannot review scans not to mention the emissions that go with the travel.
A radiologist can only work with one hospital, so another hospital would have to do exactly the same thing.
By paying on per transaction basis, the hospital's fixed cost base is reduced.
I cannot understand how anyone would view this as something other than a win for the NHS, the patient, the radiologist and the environment.
Personally, I think if one were to have a problem with this company serving the NHS (like Smith & Nephew and Siemens and GSK and Siemens and recruitment agencies do), then it is likely due to an ideology that denigrates the private sector.
I expect stockopedia members probably do not share such an ideology.

That's the rant over - many thanks for the write up Roland.
V

LeoInvestorUK

While I'm sure lack of liquidity doesn't help, the reason for the recent price weakness is pretty clearly related to Peel Hunt cutting their target price from 143p to 126p on 18th June - the share price fell from 148p to 126p around the same time. (It then overshoot to 115p before recovering)

Since there are no updates since September for brokers on Research Tree, private investors are left rather in the dark.

.

scrooge

Thanks for bringing this company to our attention. I looked at Medica (LON:MGP) some months ago and dismissed it at around 150p,- and didn't keep it on my watchlist-despite the genuine growth prospects. There seems to be nothing inherently difficult in what the company does and little patent protection. A competitor with proven Health Care administration skills and competent IT /communications capabilities could develop a competing service quickly. But there are many other opportunities for such businesses within the Health Services so little reason to develop directly competing product. So much depends on management not tripping up- so many do while seeking fast international expansion.

I will follow more regularly now and should the price fall again, I will become a potential buyer. Thanks to Roland and to Stockopedia

finebone

25th Jul '19

Up 7.5% today. Promising start!

The director sale of over 1 million shares probably didn't help either :-/

SIF Folio: Is Medica the investing medicine I need?

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Roland Head

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