Capitol Health Ltd (“CAJ”) – Healthcare upside!

[steve fleming]

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....

[shasta]

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....

Ive started compiling a healthcare watchlist, but its the filtering thru the better companies im finding the hard part.

I found MLA & picked it in the ASX comp & even though its up 300% its still is small cap ~$15m

[percy]

I brought a few CAJO at o.08 today.As I have PGC and PGCOA but do not have any MLA I expect MLA will be the bolter.
Confession time.In about 1995 after EBO in NZ had gone for a run,I sold a few and brought Aussie junior medical supply company PNX.,which shortly afterwards went belly up.!! So nice to be onto "profitable" ones.Thanks for the research,SF,shasta and KW.

[shasta]

I brought a few CAJO at o.08 today.As I have PGC and PGCOA but do not have any MLA I expect MLA will be the bolter.
Confession time.In about 1995 after EBO in NZ had gone for a run,I sold a few and brought Aussie junior medical supply company PNX.,which shortly afterwards went belly up.!! So nice to be onto "profitable" ones.Thanks for the research,SF,shasta and KW.

I'll post some of the healthcare stocks im following, once i work out the EV's etc, so we can filter the best ones out & give the heads up BEFORE they run

[steve fleming]

You had me at "profitable" :-)

Any others that you didnt mention Steve?

Hi KW

The following are also on my "profitable micro-cap medicals' watchlist (but maybe too small/illiquid for most)

Medtech Global Limited (MDG) – Market cap of $6m (Reported FY11 half year EBITDA of $640k), might start a thread on them
ITL Limited (ITD) – Market Cap of $8m (Reported FY11 half year EBITDA of $1.8m)


Am keen to see what Shasta comes up with, as am looking to increasingly reduce my resources exposure, infavour of other market opportunities.

[Sauce]

as am looking to increasingly reduce my resources exposure, infavour of other market opportunities.

Steve,
You are a smart man.
Regards,
Sauce

[shasta]

Hi KW

The following are also on my "profitable micro-cap medicals' watchlist (but maybe too small/illiquid for most)

Medtech Global Limited (MDG) – Market cap of $6m (Reported FY11 half year EBITDA of $640k), might start a thread on them
ITL Limited (ITD) – Market Cap of $8m (Reported FY11 half year EBITDA of $1.8m)


Am keen to see what Shasta comes up with, as am looking to increasingly reduce my resources exposure, infavour of other market opportunities.

Working on it!

I wanna digest what they actually do so i can offer a little more than just the EV figures

I got about 17 companies

[steve fleming]

Steve,
You are a smart man.
Regards,
Sauce

Haha....not sure that my wife agrees with that statement!

However, I do think that the easy money in resources has already been made over the past couple of years.

I am also getting pretty sick of the constant games and manipulation that takes place in alot of the smaller resource stocks.

I think that the shareholder base in industrials is generally alot more sophisticated, who don't partake in such games.

So have been moving funds out of resources into other industrial opportunities.

[steve fleming]

CAJ announced their half yearly tonight:

NPBT of $1.05m
Operating CF's of $2.9m(pre capex)

Plus a profit upgrade thrown in as well:

"Based on the anticipated trading pattern for the remainder of the financial year, the above results annualized will exceed previous market guidance of Operational Revenue of $41m+ and Net Profit Before Tax of $2.25m for FY11.

The Directors expect that previous market guidance may be exceeded by a factor of between 3- 4% for the full year if the current operating environment holds.

The company continues to self-fund investments in capital expenditure and pursue acquisitions that will add to shareholder value."

Interesting to note that the company emphasised that the intangibles are fully supported by future cashflows. Intangibles are valued at $20m, yet CAJ's m/c is $12m.

I am pretty impressed by the results - will see how the market reacts tomorrow.

[Lego_Man]

I am pretty impressed by the results - will see how the market reacts tomorrow.

Pretty well it looks like. Glad i got in yesterday @3.9c...