Stock Pitch - Integrated Diagnostics Holdings (LON:IDHC)

6th Aug '21 by Jack Brumby

24 comments 6749 reads

If you focus on the financial data alone, few listed companies can compete with the kind of consistent double digit growth rates and profit margins notched up by Integrated Diagnostics Holdings (LON:IDHC) - yet this company trades on just 13.8x forecast earnings and is expected to pay out a generous 5.7% dividend.

So why the modest valuation for what appears to be a growing, cash generative healthcare provider in expanding markets?

A part of the answer might be to do with those expanding markets - IDH operates in Egypt and across certain other North African countries. They come with increased opportunities, but also with increased risk. IDH is not your typical London-listed company.

Investors are wary of overseas listings and the group’s abrupt change of auditor only adds to that dubious impression.

But the growing disconnect between financial execution and valuation appears to present an opportunity to buy into a high quality operator exposed to structural growth markets. That’s if you can get over the overseas listing, jurisdiction risk, and abrupt change of auditor, of course. So is this company being unfairly shunned, or has it been left alone for good reason?

IDH was pitched to the Investment Club on July 13th at a share price of $1.19.

Bull points: Double digit top line and bottom line growth over many years; double digit returns on capital and profit margins; net cash with great cash conversion; structural growth drivers in growing, fragmented markets; dominant market position in Egypt with economies of scale and barriers to entry; accredited brands give it pricing power; capital-light expansion model.

Bear points: emerging market volatility and geography risk; short listed history and limited analyst coverage; recent abrupt change in auditor; temporary Covid boost to diagnostics trade; products and services could become lower margin and more commodity-like in future.

Profile

About the Stock:

Integrated Diagnostics Holdings (LON:IDHC) trades in the Healthcare segment as part of the Healthcare Providers & Services industry group.

It listed on the LSE Main Market in 2015 and listed in Egypt (EGX) in May, 2021. It is an Egyptian company with headquarters in Jersey and expanding operations in the Middle East and North Africa (MENA).

The market cap is around £513m, although shares are thinly traded and the spread…

Unlock with Email

Unlock with Google

Already have an account?
Login here

tim boddington

6th Aug '21

The fundamentals are impressive, especially the margins which ultimately drive the business forward. The fact that this company is London listed is a great demonstration of its organisation and potential. The directors have been buying shares for some years and not selling which is a sign that they are fully committed. The company is dual listed on he Nilex Egyptian stock market as well. I have bought medical devices from Egypt tend the quality can be excellent but I always have a certain doubt about the fact that the country is basically a dictatorship run by Abdel Fattah Al Sisi and is not a democracy. However apart from Lebanon no country in the Middle East is a democracy and this need not be a limitation to investment. This depends on your approach. I will be investing gin this company as I have done with similar Hikma Pharmaceuticals. but it will always be a smallish holding.

AlanJenkins2

Capex has fallen quite sharply for the past two years.Unsure if that is sustainable.

Manish1

KPMG resigning should be a major red flag !

Momoko Miyamoto

I've recently built a position in Integrated Diagnostics Holdings (LON:IDHC) . the liquidity is poor so had to buy in several small tranches and call up the broker. The CEO (and her mum who set up the first lab) own 25% via their holding vehicle, she is also a trained clinical pathologist (with US research experience) who has a thorough technical and scientific understanding of the industry. The company reports in EGP so the currency devaluation over the past few years need to be factored in when considering growth figures in USD or GBP. The company's recent expansion into radiology services while leveraging its brand has fantastic further growth potential both in Egypt and other large markets like Nigeria. Integrated Diagnostics Holdings (LON:IDHC) also engages with customers digitally e.g. delivering results via app which may bring further sales opportunity. Egypt's population is ageing which is likely to bring greater demand for medical services all else being equal and elsewhere in Africa populations are better fed and fatter leading to more chronic disease e.g. diabetes and hypertension.

The share price is currently around where it was at the heavily oversubscribed IPO (there has been a stock split) , so given the impressive revenue and profit growth since then the company has significantly derated. I would speculate that the turbulent economic and political circumstances in Egypt has left institutions to largely avoid the shares for now. But in such an environment this business is about as defensive as it gets ( and has a competitive moat to boot).

My view on the recent COVID-19 testing bonanza the company has benefitted from is that these revenues will be somewhat sticky. Egypt currently has a very low vaccination rate, new variants will continue to emerge and test manufacturers are developing other tests for viral respiratory infections e.g. influenza. In future patients (and their doctors) will want to know which virus is causing their cough and will be able to pay for a test to find out.

the company's Cairo "megalab" opened and got a US certification in 2018. Was a large one-off spend so likely explains the fall in annual capex. It appears it is quite cheap for the company to open satellite branches which then feeds tests into the larger existing labs.

AllanDavie

It is possible that the returns may not be as high in sterling terms due to the Egyptian inflation (the accounting currency is the Egyptian pound). Projections of inflation up to 2026 are around 7.5% and in the recent past have varied between 4% and 23%, rendering some of the historic growth meaningless. Inflation must be considered as a major risk for this asset. I do not hold and this inflation risk means it is unlikely to make it to my watch list. https://www.statista.com/stati...

large9876

I bought in just before Q1 2021 results were released in June. By following the link in the Q1 RNS I was able to join the company presentation which unusually mixed private investors with analysts. Whilst the presentation basically repeated the RNS and was a bit dull the company did a good job of trying to answer the questions.

What came across was the company appears to have good control of pricing and is ensuring a standard margin across the range, COVID tests are more expensive but produce the same % margin so are benefiting the bottom line significantly. It came across that the companies forecast that 2021 revenue will be ‘more than 20% above 2020’ is a major understatement. Q1 revenue (1130 EGPm) is equivalent to 42% of 2020 full year revenue (2656 EGPm) and the company confirmed that Q2 had continued as Q1. So I am hoping that H1 revenue alone will be close to 2020 full year. There is scope for a significant upgrade of forecast at that point. I think the company are estimating a drop off in covid related tests fairly quickly, but I wonder if this will be around for some time so 2022 numbers could also be conservative.

The company is also clearly considering M&A and it sounded like they have targets in mind but were playing cards close. They were pushed to say whether the target was middle east based which they sort of did. Clearly the Nigeria addition does not look impressive at this point. They have put in place a US$ 45million financing facility for this purpose.

The company has an excellent investor relations web presence with lots of info.

Not without risk, but plenty of positives at this point.

Chris860

7th Aug '21

50/50. Egypt is currently a stable country but can be volatile occasionally. The fundamentals look encouraging but I personally would rate the stock a bit more speculatively

Rob White

No mention of the risks from politics and religion. Are the key players ie main shareholders, sponsors, etc friends or competitors of the ruling elite? Or do these people own the competitors so that with a little help from the powers that be they could force IDH into an unfriendly "merger"?

timarr

I was intrigued by the reason KPMG gave for resigning as auditors, which I'd never heard of before:

The circumstances connected with our ceasing to hold office relate to our concerns in relation to the robustness of the control environment at the Company

I went and had a look at what a 'control environment' is.

In essence the control environment is the culture and rules that ensures that the employees behave in a way that ensures accurate and consistent financial reporting. For example, making sure there's a robust process in place for checking sales invoices.

So if an auditor is unhappy about the control environment it means it lacks confidence in the information it's receiving. And, presumably, that means it needs to spend more time crosschecking everything to the point where the audit is uneconomic - which KPMG did to the point of being happy to certify the results before walking away.

Personally I wouldn't invest in this - if the financial controls are weak then the possibility of fraud is increased. Auditors can only pick that up after the event, assuming they do at all. That really isn't a safe situation for an investor.

timarr

gus 1065

I agree - auditor resignation in these circumstances makes it a bargepole stock for me. I had a bad experience in a previous life with a private company in the U.K. where the auditors (PWC in that case) resigned and the whole thing unravelled as one big fraud and several directors ended up going to jail.

Reading the company RNS (note the statement is from the company rather than KPMG or the new auditor designate PWC directly) I would be very wary until PWC are definitively signed up and ideally have done their first full audit. It’s possible KPMG have signed off their audit but we don’t know with what caveats. For example they may have made their sign off conditional on being able to assume all information from the company and its officers and employees is true and complete - which is a nonsense if they don’t Trust the Control Environment. It could be the audit issues relate to the possibility of a few suspected fingers in the till at the bottom of the Food chain, but equally might be something rotten a lot higher up in which case the problems could be a lot more serious. It could all be perfectly innocuous and in time the company’s probity will be proven but why take the risk?

Gus.

paradisiaque

The PE certainly looks reasonable, but is it possible to calculate what it would be on an ongoing basis if the COVID revenues were excluded?

samsland

9th Aug '21

If it looks too good to be true, it probably is. Why is this company listed in the UK?

MaxPower27

10th Aug '21

Really fantastic summary Jack on £IDHC. In line with my views and bought at 79.55 on 29/3/21 and 2nd tranche on 3rd June following positively quarterly update, which was regrettably just before the disappointing KPMG statement (as an accountant myself by background). However personally: a) think the concerns are in the price b) it is a great blend of value (increasingly so as you said) with growth (asset-light business that is funding its own growth and in growth markets). c) the quality of the investor presentations and data is better than most other companies, which I find reassuring with the high management stake and alignment. I originally heard about it from a podcast with ScotGems, who hold it and it is one of the largest single-company positions I hold so wish the club and all others well with it!! (but a small part of my overall portfolio so happy with this). MP27

mark1308

11th Aug '21

Yes Timarr I totally agree with you. The cons heavily outweigh the pros for me here esp. the auditors points. However Jack I thank you so much for great work here and I very much look forward to the next stock featured. What a great site this is !

Robo_Steve

Interesting defensive business for sure, i look at their results once per year, i wasn't aware of the auditor resignation, that's concerning, also their perfect financials are a slight concern. I keep my position at around 3%

I found these guys by going stock by stock through Terry Smiths sister fund FEET which i also own. I have been following the company for a few years, take my deep dive with a pinch of salt, i'm no accountant link

rwedgbury

15th Aug '21

The one thing I misssed was any reference to who the directors were and what background they had.

Indie

2nd Sep '21

Today’s half-year report reads well:

“Integrated Diagnostics Holdings Plc delivers exceptional growth on the back of strong demand across its entire service portfolio”

michaelhook

1st Oct '21

company has more upside than down although it does appear to have fragile foundations buy with tight parameters for a quick opt out, large movement in the price would be of concern

21st Apr '22

Great preliminary results today, phrases like Outstanding Performance and All-time High. Increased dividend.

Stock Pitch - Integrated Diagnostics Holdings (LON:IDHC)

Profile

Unlock the rest of this article with a 14 day trial

About the Author

Jack Brumby

24 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...