Radiology and diagnostic imaging service provider, Capitol Health (CAJ), has announced their preliminary full year EBITDA result of $22m, 10% ahead of prior guidance. Along with the previously announced sale of their NSW assets (settling August 2017), the company’s total debt of $50m will be eliminated taking the business to a net cash balance of close to $45m. Factoring this in, the company has announced both a re-instated dividend and a share buy-back. Importantly, guidance for FY2018 (including just 2 months of the contracted NSW assets) has been set at ~$20m EBITDA.

Last financial year Capitol Health became another roll-up casualty, expanding too rapidly and making debt funded acquisitions that were not effectively managed or integrated. Adding fuel to the fire, proposed changes to the Medicare rebate scheme saw demand for high-margin MRIs drop, earnings fell and the share-price plummeted, almost 90% from its highs. New management was brought in in November 2016 and a $38m capital raising was completed in February 2017. In June 2017, the company announced the sale of their troublesome NSW assets including Southern Radiology to I-MED for ~$80m. Importantly after a year of decline, Medicare system growth is returning to longer-term growth rates.

There is no doubt Capitol Health’s footprint of over 50 Victorian radiology clinics is a strategic and valuable defensive healthcare asset. On those assets alone, a prospective forward EV/EBITDA multiple of 10x looks fair. Government restrictions for issuing new MRI licenses means barriers to entry are high and Capitol Health’s open register makes it an open takeover target. Further value can be attributed to Capitol Health’s JV with CITIC in China’s diagnostic imaging market and Capitol Health’s shareholding in US-based artificial intelligence company Enlitic is shaping up to be next tech ‘unicorn’ and could add serious value to Capitol Health shareholders.


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