Integral Diagnostics (ASX: IDX) shares are down 27%. The reason for the fall in IDX shares is the operating update release. Integral is being afflicted by inflation on its inputs - as everyone obviously is. But they’re not keeping up with the growth in the market nor the inflation in revenues. This is obviously compressing margins and that’s not a good thing. It’s worth our recalling Baumol here. Medical services are going to have a higher inflation rate than the economy more generally, simply as a result of their nature as services where the major operating cost is highly skilled labour.
The business itself: “Integral Diagnostics Limited, a healthcare services company, provides diagnostic imaging services to general practitioners, medical specialists, and allied health professionals and their patients in Australia and New Zealand. It provides services through 67 radiology clinics.”
There have been warning signs: “Integral Diagnostics EPS Misses Expectations
Revenue was in line with analyst estimates. Earnings per share (EPS) missed analyst estimates by 5.5%. Looking ahead, revenue is forecast to grow 7.0% p.a. on average during the next 3 years, compared to a 5.6% growth forecast for the Healthcare industry in Australia.” And there’s this: “Though the year started out rocky, Integral Diagnostics had a good 12 months overall. Revenue of $441m was up 22% – a rise of 7% excluding acquisitions – though this was against the backdrop of a pandemic-impacted prior period.” 7% isn’t enough in this inflationary environment.
Integral Diagnostics share price from Google Finance
Goldman Sachs seemed to think things were going to be fine: “Goldman Sachs has Buy recommendations on two diagnostics imaging specialists Capitol Health (ASX:CAJ) and Integral Diagnostics (ASX:IDX). For Capitol Health, Goldman has a 12-month target price of 33c (vs current market price of 28c), while for Integral, the target price is $3.70 (vs current price of $3.45).” That err, didn’t quite work out. Obviously.
The reason is here in the trading update: “In Australia, first quarter revenue growth of 8.4% was achieved compared with the prior corresponding period. In comparison Medicare benefits for the States in which IDX operates have seen a 9.5% increase in weighted average benefits paid, adjusted for working days. In New Zealand, IDX achieved a 4.1% NZD increase in revenue compared with the prior corresponding period.” That revenue number is a reasonable enough proxy for the inflation rate in medical services. They’re not managing to keep up with that sector specific inflation rate - revenue is shrinking in real terms that is. Then there’s also this: “Clinical staff shortages, particularly in regional areas, and cost inflation have continued into FY24 driving labour costs to be higher than expected, adversely impacting Operating EBITDA. As such we have not seen the expected Operating EBITDA margin improvement in Q1 FY24 relative to 1H FY23.” They’re suffering from the sector specific inflation rate on their input costs though. This is compressing margins.
As we all know corporate numbers are not inflation adjusted. But what’s happening here is that inflation is attacking the business. Integral needs to be able to push up revenues at the same speed its cost base rises - which it isn’t, thus the pressure on margins.
