Ann: Investor Presentation - FY20 Result, page-4

Digital imaging application for the radiology sector has become a bit more than  a mere cottage industry in recent years.

I'm aware of 4 companies active in way, some shape or form in this space, and which are now listed on the ASX:

There's the fully "grown-up", (and now well-known), PME, which is today a near-$5.0bn gorilla, which, needless to say, is profitable, generating some $40m in EBIT in LTM to 31 December 2020.  

Next - extending the demographic theme -  there's the "aspiring professional", M7T, which was acquired as part of a RTO in 2015 is today a multi-hundred million dollar company (EV is $330m), generating some $20mpa in Revenue and a couple of of million of dollars in EBIT.

Following that is the "recent graduate", IME, which was formed in 2012 and came into being as a listed entity in just 2018 (acquired by an ASX-listed entity, so in effect, also an RTO).   IME's Market Cap is $59m, and it's EV is around $50m.

Finally, there is the only-just listed "toddler", SHG, with a market cap of $28m (EV of $21m after the recent IPO capital raising).

Summary of some salient financial parameters of these stocks follows:




When it comes to investing in this space, IME's appeal stands a mile out from the rest:

SHG is still way too early for me, because it is not commercially self-sustaining and I am unable to say when it will become commercially self-sustaining.   

As for the other end of the spectrum, PME clearly does not require recourse to shareholders to fund its growth, the stock is price on an EV/EBIT multiple well in excess of 100 times (and I certainly don't feel like paying that!).

So that leaves M7T [*] and IME as the likely investment candidates.  

M7T and IME have similar orders of magnitude of Revenue, EBIT and Cash Flow... they are both at, or about at, earnings and cash flow break-even:


To be fair time-wise, M7T is about 12 months ahead of IME.

But IME's EV is a mere 15% of M7T's

Now some of this can be explained by IME's perceived elevated counter-party risk, given IME operates in Latin and South America (and has indeed booked meaningful provisions for credit losses in recent results... $54k in FY2020 and $670k in FY2019... although, to be fair,  M7T has not fared any better, which credit losses of $170k in FY2019, $245k in FY2020 and a whopping $718k in DH2020).

But even after allowing for the perception - rightly or wrongly - of increased counter-party risk with IME, the valuation gap between it an M7T still appears way too wide.

Maybe a 25% or 30% valuation discount is warranted, but not 85%, I wouldn't have thought.


Of course, one stock in a sector looking attractive relative to other stocks in the same sector is not sufficient basis for investment; a stock has to be undervalued in absolute terms.

On that score, in constant currency terms, IME has been growing its Revenue's at above 50%pa over the past few financial periods (even during the throes of Covid  - which greatly impacted IME's primary markets - Revenue in CY2020 still increased by 42% (up a whopping 59% in constant currency terms)).

If IME's Revenue growth continued at 40%pa for the next three years, its current $11m pa in Sales run rate will grow to $30m pa.

And even if the $13 m cost base of the company was allowed to increase by a most generous 50%  (and not sure why it would - the 42% increase in Revenue in CY2012 was achieved without any increase whatsoever in operating costs), that would still result in the company generating $10m in EBIT.

At 12x EBIT, or even a more modest 10x, that equates to an Enterprise Value closer to $100m, double the company's current EV.

As for whether $50m pa in Revenue is a do-able, when I look at the following sorts of pictures (recognising and knowing full well that such presentation slides are intended to promote the company's prospects), it certainly "feels" to me like this is a business that has the infrastructure and the reach to quite easily be able to generate $50m pa in Sales (and even several multiples of $50m):



Of course, being an armchair observer comes easy.

Anyone can build a financial model in a spreadsheet which spits out a valuation a lot higher than the prevailing share price, but that overlooks the very important execution aspects of the business, and there is no way of knowing to what extent the company 's managers will be able to continue to execute the growths strategy.

All one can do is look at the trends, and the execution success to date, and to apply probability-weightings to possible future outcomes.

Heck, in one scenario (low probability admittedly) $50m Revenue and  $25m EBIT is envisaged... admittedly not very likely, but not totally out of the realms of possibility, I don't think.  


[*]  Disclaimer:  I used to be a shareholder in IME (made a healthy capital profit, but sold too early effectively leaving 40% residual upside on the table).

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