Diagnostic Imaging Radiates Opportunity

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Pending MRI deregulation is behind the now approved merger of Integral Diagnostics and Capitol Health, and analysts see significant opportunity.

-ACCC approves Integral Diagnostic/Capitol Health merger
-Merged company will move to number three in diagnostic imaging
-Recent private market activity implies undervaluation

By Greg Peel

The ACCC pondered for longer than expected, but has approved the merger of diagnostic imaging companies Integral Diagnostics ((IDX)) and Capitol Health (formerly CAJ, now ceased trading, pending issue of IDX shares on December 20). The one requirement was the divestment of one clinic in Melton, Victoria, from what will be a combined network of 151 clinics across Australia.

The divestment of Melton is neither here nor there, as the clinic does not hold either a full or partial MRI (magnetic resonance imaging) licence, and MRI licences are key to recent activity in the diagnostic imaging (DI) space.

From July 1, 2025, partial MRI licences will become fully funded, and unlicensed machines at a “licensed practice” will also become licensed. It is this deregulation that is assumed to have prompted both the Integral Diagnostics/Capitol Health merger and also the prior sale of Healius’ ((HLS)) diagnostic imaging business, Lumus Imaging, to private equity.

Lumus was sold for an enterprise value of $965m. Based on varying broker earnings forecasts, varying PE ratios are claimed as implicit in the sale price. Ord Minnett, to take one, suggests Lumus was sold at an FY26 forecast PE of 12.6x, with Integral/Capitol trading at 8.3x.

This transaction continues to highlight the disconnect between the value ascribed to these assets by PE versus public markets, notes Ord Minnett.

Four and Five become Three

The deal will merge the fourth and fifth radiology operators to become the third largest operator by number of clinics, Bell Potter notes. The merged group will have a mix of community and comprehensive clinic sites and its market share in the lucrative MRI sector should rise by more than 100 basis points to 8.2%.

Beyond the claimed $10m in annual pre-tax cost synergies, the merger should be able to generate operating leverage, utilise a wider referral base, and develop telehealth opportunities inside former Capitol clinics, to name but a few synergies.

The next phase of MRI deregulation represents a potential key strategic rationale of the merger, Bell Potter suggests. It may lead to the merged group extending operating hours, generating additional hourly throughput across sixteen MRI machines that will convert from partial licenses to full licenses.

In the longer term, Canaccord Genuity believes top-line synergies, referring benefits and further structural costs savings, such as incorporating the higher-margin teleradiology offering across the enterprise, could drive more material margin expansion.

Strategically, Jarden sees numerous value-accretive opportunities from the pending merger.

The merger introduces significant additional scale, this broker notes, enhancing operating leverage, the merged company should capture a wider referral base from its broader metropolitan, hospital and regional clinic network, and, as mentioned, Integral intends to introduce telehealth opportunities to Capitol clinics and radiologists.

The implementation of Integral’s enhanced billing accuracy system across Capitol clinics is expected to identify missed revenue opportunities from miscoding. These opportunities should all add to the $10m in cost saving initiatives identified by management.

From a structural perspective, there are some big opportunities emerging with the biggest one being the aforementioned MRI deregulation. Jarden expects the upgrade of seventeen partial MRI licenses to fully funded machines from July will generate significant revenue opportunity. It is important to note, says Jarden, this upside comes with minimal capex investment.

Finally, the Australian Government National Lung Screening Program will provide additional funding for DI scans for the early detection of lung cancer. This program will also commence on July 1, 2025.

Given the significant radiologist shortage in Australia, Macquarie expects a better ability to utilise specialists across clinics. Capitol should benefit from both Integral’s teleradiology business and AI capabilities, which Macquarie expects to be rolled out across the merged group.

Re-Rate

The merged company will be the clear number three player, Ord Minnett notes, in a sector that benefits from long-term demand drivers, high barriers to entry and looming MRI deregulation. At the Lumus multiple, this broker calculates an implied value of $4.58 for Integral Diagnostics. Factoring in a control premium of some 30%, Ord Minnett sees 10x as a more realistic multiple for Integral, translating to $3.48.

Since the merger was proposed in September, Integral Diagnostics’ share price has re-rated by around 15%, but remains well short of upgraded broker target prices.

Macquarie (Outperform) sees the merger providing significant earnings per share accretion, with further upside potential from revenue synergies not captured in forecasts. This broker sees further benefits from a balance-sheet perspective, given reduced leverage.

Macquarie’s target rises to $3.50 from $2.90.

Jarden has actually reduced its target, simply because it had expected the merger would take effect on December 1, not December 20. But the reduction is only to $3.68 from $3.72, and Jarden retains Buy.

Bell Potter initiated coverage of Integral Diagnostics with a Buy rating, and set a target of $3.87.

Canaccord Genuity has not yet updated post ACCC approval, previously setting a Hold rating for both companies.

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