7:59 cut – MGP

Medica (MGP) – H1 2019 Update

Medica Group provide outsourced radiology analysis services to the NHS. They are an intermediary in the move from hospitals directly employing radiologists to interpret scans to radiologists doing the work from home over the internet.

Their share price fell in mid June when Peel Hunt cut their target price from 143p to 126p, potentially creating concerns that estimates would not be met.

Today they update with strong H1 figures, up 18% YoY and up 7% sequentially on H2 2018. These are strong figures compared to previous H1s and they confirm that FY revenues are likely to be “slightly ahead” of expectations. Looking at recent growth rates and H1/H2 splits, FY revenues look (to me) likely to be over £46m, which would put them 6% above current expectations.

However they say that profits are currently expected in-line “as the Company continues to invest in optimising the business for future growth”. Investors will hope that this doesn’t include the dreaded “investing in price”, e.g. being forced to cut margins in order to make sales.

EPS growth is forecast at well over 20% this year, currently slowing to 12% next. Both 2019 and especially 2020 forecasts have been trending downwards since the autumn and prior to that the company has a poor record of hitting original forecasts, in particular hitting capacity constraints (I believe in the number of radiologists) in Q4 of 2017. More recently there is a pattern of them guiding broker consensus downwards and then issuing “inline with market expectations” trading statements.

Potential reasons to invest are:

  • Defensive, recession and likely Brexit-proof business
  • Good EPS growth: >20% recently and at least 10% likely sustainable over the long term
  • Relatively undemanding valuation of 14x forward PE
  • [Edit: Strong cashflow]
  • No net debt

Reasons for caution:

  • Massive exposure to a single customer
  • Political risks since involved in NHS outsourcing
  • Very poor record of hitting forecasts
  • Dependent on recruitment of radiologists
  • In some ways they have the characteristics of a contractor recruitment agency

Due primarily to the management’s poor track record of hitting forecasts, I am going to sit tight with my moderately-sized holding this morning.

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