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Margins Signal Integral Diagnostics Recovery

Australia | Sep 07 2023


Analysts identify a second half FY23 inflection point for Integral Diagnostics.

-Integral Diagnostic’s FY23 earnings beat consensus 
-A strong second half suggests a business turnaround
-Management guides to a higher medium-term margin
-Pricing power underrated, says Goldman Sachs

By Mark Woodruff

Last week's FY23 results for Integral Diagnostics ((IDX)) revealed a stronger second half, ongoing market share gains and moderating expenditure growth. Analysts subsequently adopted a range of synonyms to describe a turning point for the business.

Management achieved its rather loose earnings guidance for a “materially stronger” second half, and in the process beat the consensus forecast by around 2%.

In response, Wilsons upgraded its rating for the shares to Overweight from Market Weight and raised its 12-month target price by 30% to $3.40, around 20 cents above the average target price of four covering brokers in the FNArena database.

“The tide is turning” for this provider of diagnostic imaging services, according to Wilsons.

Integral Diagnostics owns and operates radiology practices in Victoria, Queensland, Western Australia and New Zealand.

While FY23 operating earnings of $85.2m were in line with Wilsons' forecast, rising second half revenues lifted the group margin to 20.2% from 18.5% in the first half.

All the margin benefit was from Australia, where market share, indexation, pricing and modality shift more than offset expected cost increases, explained Wilsons.

Growth capex over the last two years was nearly 80% more than the preceding two years, providing potential for group margins to reach 23.4% by FY26, suggest the analysts. Management is targeting mid-20%’s by FY26.

Revenue grew by 22% in FY23 to $441m, of which 7% was organic, with the balance due to the Peloton and Horizon acquisitions. Organic growth was supported by a 5.7% increase in average fee per episode with volumes rising by 1.3%.

The second half delivered organic revenue growth in Australia and New Zealand of 10.3% and 4.7%, respectively, which compares to growth of 4.2% and 4.7% in the first half.

The New Zealand business was impacted by ongoing market share losses and limited indexation/price growth, noted Ord Minnett.

Management anticipates ongoing strength in FY24 via organic revenue growth in Australia and further earnings margin expansion.

Overweight-rated Jarden noted the company had “turned the corner” and flagged further longer-term fixed cost leverage opportunities as inflationary pressures abate.

The board declared a 3.5cps final dividend making the payout 6cps in total for the full year, down -14% by comparison to FY22. No FY24 guidance was provided.


Prior to the second half of FY23, Jarden pointed out earnings margins had declined every half in the prior two years before reaching a nadir of 18.5% in the first half of FY23.

For FY23, margins declined by -140bps to 19.3% compared to the previous corresponding period, due to higher labour and interest costs, noted Underweight-rated Morgan Stanley.

Given inflationary pressures, particularly labour, Jarden doesn’t expect a return to the heady days of pre-covid when margins were 26.3%. It’s thought long-term margins will cap-out at 24%, up from the broker's 23.4% estimate prior to FY23 results.

As an illustration of these inflationary pressures, employee costs represent 61.2% of Macquarie’s revenue forecast for FY24.


To combat inflationary pressures in New Zealand, management is currently negotiating with its payers for a level of indexation.

There is currently no inflation adjustment from the Accident Compensation Corporation and District Health Boards, and limited inflation indexation from private health insurers in the country.

In Australia, relative to Medicare indexation of 1.6% from July 1, 2022, an indexation of 3.6% has been applied to all diagnostic imaging items except Nuclear Medicine from July 1 this year.

Further indexation of 0.5% will apply from November, which Morgan Stanley believes will result in margin improvement.

The industry may resort to charging higher gap/out-of-pocket fees (as seen in General Practice), suggests Citi, to alleviate the residual cost pressure not compensated for via indexation and operating leverage.

Higher interest costs

Higher debt levels as well as rising interest rates resulted in an around 72% increase in net interest costs in FY23, explained Outperform-rated Macquarie.

Despite minor upward revisions to the broker's FY24 earnings forecasts, higher interest rate assumptions along with higher depreciation and amortisation forecasts combined to reduce FY24-26 EPS estimates, and Macquarie’s target was lowered to $3.35 from $3.50.


The company is well positioned heading into FY24, according to Ord Minnett, due to ongoing market share gains, accelerating indexation and moderating opex growth.

This broker noted upside risk for its Australian volume growth forecasts as referrals and patient volumes continue to recover in the wake of the pandemic.

Goldman Sachs referred to potential benefits from a structural shift to higher acuity modalities, a point Evans and Partners expanded upon by noting the clinical trend towards higher CT, MRI and PET scans.

The company’s pricing power is underappreciated by the market, according to Goldman Sachs, and the analysts also see potential upside via M&A activity, whether Integral be an acquirer or a target.

Macquarie remains positive on the outlook for Integral Diagnostics over the medium-to longer-term, with improving revenues on a largely fixed cost base underpinning margin expansion and solid earnings growth.

FNArena's daily monitoring of Integral Diagnostics consists of four brokers with two Buy (or equivalent) ratings, one Hold and an Underweight recommendation by Morgan Stanley.

Evans and Partners, Goldman Sachs, Jarden and Wilsons are not part of FNArena's daily monitoring.

The $3.21 average target price of the four brokers suggests around 6.7% upside to the latest $3.01 share price.

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