Teleradiology provider Medica (MGP) has delivered a strong set of results with adjusted operating profit rising 15.4% to £4.9m in the first half of 2018, but it doesn’t seem enough to regain investor confidence given how the share price has barely moved on the numbers.

Medica floated on the stock market in March 2017 and generated a lot of initial excitement from investors and fund managers alike. It uses consultant radiologists to interpret CT and MRI scans to diagnose various diseases.

Recruitment problems caused sales to miss expectations toward the end of 2017, followed by a profit warning in January 2018. A quarter of the company’s valuation has subsequently been wiped off.

Strategic Equity Capital (SEC) fund manager Jeff Harris told Shares in May this year that he’d been buying more stock in Medica, saying the long term structural drivers for the company remained strong.

Indeed, the latest figures do paint a picture of a successful company. Sales in the first half of 2018 have grown by 18.2% to £18.5m thanks to strong sales of emergency reporting service Nighthawk and Cross Sectional services. Net debt fell from £8.5m to £2.5m and gross profit increased by 18.9% to £9.1m.

So why hasn’t the share price jumped strongly on the news? In early trading the shares were actually down but they’ve since changed direction and were up 1.9% at 147.8p at the time of writing.

The one issue which might explain the lack of excitement is guidance for falling margins. The company says gross profit margins are expected to fall in the second half of the year and into 2019 – having managed to keep them relatively stable at 48.9% in the first half period (2017: 48.6%).

Medica attributes the anticipated margin decline to renewal of contracts at lower prices as the teleradiology market develops. Nonetheless, it says the margin reduction is expected to be more than offset by higher volumes.


Berenberg analyst Charles Weston says CT/MRI diagnostic scans are growing at circa 8% per year in the UK but radiologist capacity is unable to keep up. Part of the solution is to use teleradiology – a market that’s been growing at circa 30% a year.

‘Medica is a dominant provider with almost 50% share,’ he says. ‘Its reputation as a clinical quality leader enables it to command 5-10% premium pricing.’

Weston implies the company’s current valuation of 16 times forward earnings is too low for a company forecast to achieve 16% compound annual growth in earnings per share between 2018 and 2023.

N+1 Singer analyst Chris Glasper says Medica has an attractive, asset light business model with strong cash generation and a solid platform for expansion into several new areas.

Glasper is optimistic about the company’s growth prospects as it targets different geographies, covers more a wider range of services and even has scope for M&A thanks to the robust balance sheet.

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Issue Date: 12 Sep 2018