Company Interview / Three healthy small-caps

Key insights:

Australian Clinical Labs achieves 8% growth and margins boostRegis Healthcare benefits from increased government funding, higher occupancyIntegral Diagnostics sees margin improvements and reduced leverage

Marc Whittaker from Investors Mutual delves into promising small cap healthcare stocks. Marc highlights Australian Clinical Labs' (ASX:ACL) robust performance with 8% top line growth and a 10% buyback program. Strong cash generation and minimal debt mark their favourable financial health.

Regis Healthcare (ASX:REG) emerges as another topic. Marc notes improved government funding and increasing demand within the aged care sector. With occupancy rates at 95% and a pristine balance sheet, Regis stands poised for significant profitability growth over the next few years.

Lastly, Marc touches on Integral Diagnostics (ASX:IDX), focusing on margin improvements and reduced leverage. Increasing GP referrals contribute to top-line growth, enhancing the company's prospects. Revenue growth combined with cost control underscores a strong future outlook for IDX.

Full unedited transcript:

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Let's get now into some small cap stocks that my guest is currently watching. Mark Whitaker from Investors Mutual joins me. Mark, good to have you with us. So let's start with ACL. What are you liking about this company? Well, I thought I'd put three healthcare stocks in the small cap space across your your table, your desk. Uh, having very good reporting season results last month, ACL is the one of the basically the third largest pathology company in the country. It's a name I've pushed for quite some time and actually rewarded that that that push and the reporting season up very strongly. But what I really liked about the result was the margin expansion that we've seen. So initially for small cap healthcare stocks in particular more recently has been the bottleneck in GP availability. We're starting to see that free up, which means we're getting more referrals to the likes of radiology, the likes of pathology and ACL. That result really show that that top line growing really nicely, up 7 to 8%. And what was really pleasing was their outlook statement was the month of July and August have seen the top line growth rate closer to 8%. So we're starting to see a rebound in those pathology volumes coming through. And what that means is that we should start to see the margin accrete, because if you're a

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pathology business, your cost base is largely fixed at 70 or 80% fixed. So the operating leverage in that business is volume returns is quite market, quite sharp. And we're starting to see that. So the second half margin closer to that 10% target that they've mentioned previously. And the market really liked that. And what we saw as a result of that was some very strong cash generation. And they've announced a 10% buyback. So good revenue growth coming margin accretion coming balance sheet looking very strong. They're almost net cash not quite but a very little amount of debt sort of embarked on that 10% buyback program over the next 12 months. So really well positioned 14 times this year's earnings 4.5% dividend yield. Looking good. All right. So that's Australian Clinical Labs Regis Healthcare also you like aged care has been in the wars for quite some time. It's emerging from that that post-war haze. Yeah. Government funding is coming into the sector. 40 to 50% of the of the sector still remains underwater. So Regis is one of the best placed operators in the space to benefit from improved fund funding coming into the sector. So we have some aged Care Taskforce

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recommendations coming in with regards to funding over the next week or so, and that should see more funding come into the sector. So what we've seen again, with wages and with the aged care sector in general, is that we've had a recovery post-Covid. The baby boomer generation is ageing. They're moving into that aged care retirement home stage of life. And what we have is demand greater than supply. So we've had an under build in the sector for probably the last 5 to 10 years. The number of beds hasn't really grown as quickly as what the demand is coming online. And so if you're an aged care operator, you're well positioned, you've got good operations, you're you're consistent with your your reporting obligations, your compliance obligations. You are very well placed to do extremely well over the next 3 to 4 years. Current occupancy for Regis is 95%. Well, the last time we saw 95% occupancy was back in probably 2015, 2016. At that time there operating margins were over 20% they're currently doing 12.5%. Now, the operating leverage in the industry isn't quite what it was because you've got more, as I say, you've got more obligations with regards to compliance reporting,

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staffing requirements minutes that you need to provide to residents, and rightly so. So the operating leverage in the business isn't as strong as it was ten years ago, but it's getting better. So those those margins, which are currently 10.5% should be moving towards 12, 15%. And so we've got a real step up in profitability, particularly for wages. But the sector in general. All right. Balance sheets pristine net cash. So again the common theme here is revenues growing demand improving supply constrained balance sheets very strong. Generating good cash, paying out 100% but still got ample room on the balance sheet to undertake accretive M&A, strategic M&A and grow those earnings further over the next 2 to 3 years. Right. So from aged care now back to radiologists. So integral diagnostics what is looking good about this company. Consistent themes again so growing top line. So we've got indexation. So one thing we've seen with the government in the last little while is the the bulk billing incentives. The GPS has improved which means more people will visit the GP, which means we get more referrals to aged healthcare specialists. So radiology should benefit. Pathology that

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we spoke to should also benefit. So IDC's the issue for them in the past couple of results that the report is their margins have been under pressure. You've had cost increases. Top line was muted because of those those lack of referrals by the GP channel. That's improving. So what we saw in the second half of their fiscal year result last month was that their margins have moved from 18% up to 20%, and that's what the market was looking for. Can you grow margin? Have you got your costs under control? That top line is growing partly because of indexation and partly because the mix of imaging that they do is moving to a more higher mode of imaging. So CT scans, CT scans, they're higher margin. You can charge more. There's some ability to charge a co-pay with those those scans as well. And so those margins are growing. We're seeing 20%. They should continue to grow again. The balance sheet is under control. It was close to three times leverage net debt to EBITDA going back two years. And the market was saying guys that leverage is too high. They're back to two and a half times now and that gearing is going to continue because they're generating good cash. Inflation is abating so that the cost impulse that they were

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seeing on the on the cost line that's across the sector in general is starting to moderate. So you can start to grow those revenues at five, six, 7%, your cost growth moderating to 4 or 5%. You're starting to get these positive jaws. And that's really beneficial as again, as an aged care or health care provider, a lot of your costs are fixed. Staff is a big component of that. So if you can start to of your variable costs, you can start to cycle higher revenue growth.