Healthcare is quickly overtaking retail as the largest sector in the economy – and i am increasingly going heavy into profitable fast growing micro- cap healthcare plays, which provide, IMO, very attractive exposure to the increased health expenditure spend.

Have been buying CAJ /CAJO over the last couple of months since they reaffirmed their full year guidance at their November AGM. Guidance was again reaffirmed last Friday.

CAJ is Australia’s only listed pure-play diagnostic imaging company – it derives approximately 90% of its revenue from bulk billing. Currently 28 clinics with 7% VIC market share growing at +12% yoy.

Per a Mergermarket Report – “ The diagnostic imaging market is currently unsustainable and will see consolidation as larger players face pressure from market demand to move to a bulk billing model, while smaller players face financing pressure from government moves to reduce rebates for companies with older equipment. The diagnostic imaging market is currently dominated by Primary Health Care (ASX: PRY); Sonic Healthcare (ASX: SHL); and CVC-owned I-Med Network.

The mid-tier space includes Capitol Health (Victoria) and two similar-sized private businesses, one in Adelaide and one in Sydney, followed by numerous fragmented smaller players.

While it makes sense for Melbourne-headquartered Capitol Health to make small buys to concentrate the market, it could well become a takeover target itself, given its market positioning and size relative to the larger players, and is constantly on the radar of its peers. Its appeal lies in 98% of its revenue already coming from bulk billing as well as its modern equipment and single unified system.”

For a $12m market cap, IMO you are getting exceptional bang for your buck in terms of CAJ’s size/scale ($42m t/o), business maturity (ie restructuring phase is complete) and risk profile.

Forecast FY11 revenue of $41m
Forecast FY11 EBITDA of $4.8m
Market cap = $12mil
IBD (excluding equipment leases) = $2.8m
EV =$14.8m

SO EV/EBITDA is approximately 3 x

CAJ @ 4c - 303m on issue
CAJO @ 1c – 25m on issue

Finally – Patersons have a 7c target on CAJ (updated based on AGM guidance on 23/11/10) = 75% upside.

Patersons Chairman Michael Manford, and Patersons exec Aaron Constantine (Jasper Hill Resources = big bags on CEO/SLT) are also top 20 share holders / option holders in CAJ.

For me, i see these profitable micro-cap healthcare plays (such as CAJ, MLA, PGC etc) as very exciting.

2009 i saw an opportunity and went big on heaps of long-dated options that no one wanted.
2010 I saw an opportunity and took big exposures in heaps of back-door shells that no-one wanted.
I have had so many multi-baggers from these strategies I have given up counting.

2011 i am seeing a similar opportunity with these healthcare plays – with increased govt expenditure and aging population, industry consolidation, new technologies generating increasing referrals and revenues effectively government guaranteed, I think the time is right to be one step ahead of the market and get in while they are under the radar.


Anyway, just my thoughts, and quite possibly will be proved wrong....