Money Talks: These diagnostic imaging plays paint a pretty picture for investors

This article was originally published on Stockhead.

Money Talks is Stockhead’s regular drill down into what stocks investors are looking at right now. We’ll tap our extensive list of experts to see what’s hot, their top picks and what they’re looking out for. Today, we hear from Victor Gomes, principal and portfolio manager of Eiger Capital.

What’s hot right now?

While Eiger Capital is small cap focused, the boutique Australian equities investment manager has a more longer-term strategy.

Gomes said Eiger took at least a five-year view on stocks.

“So we tend to respond less to what’s hot and what’s not over the short-term,” he explained.

But Gomes does see potential in the diagnostic imaging space.

“You’d have to say that most asset classes are very expensive, and equities are no exception, but this sector is one that looks to be trading at a discount to the small cap index,” he said.

“Yet it’s got an environment where it looks to be significantly improved over where it was a couple of years ago, especially with the bipartisan view on diagnostics.

“They have been on a Medicare rebate freeze for more than 20 years. So they haven’t had any price increases for 20 years.

“Despite that the thing we like about the sector is it has this sort of long-term structural tailwinds of demographics and technology innovation.”

According to Gomes, the players in the sector have realised revenue growth by expanding their product offerings to include high end, targeted diagnostic scans, which fetch a higher price than the standard x-ray or ultrasound.

Demand for diagnostic imaging services is also on the rise as a result of the ageing population and Western diets and lifestyles creating more health issues.

Top picks

Gomes’ picks in this sector are Capitol Health (ASX:CAJ) and Integral Diagnostics (ASX:IDX).

Capitol has a market cap of around $170m at a share price of 21.5c, while Integral has a market cap of $477.5m at a share price of $3.02.

Melbourne-based Capitol owns and operates clinics in Melbourne, regional Victoria, Tasmania and Western Australia.

“They had a failed strategy under previous management where they were trying to become much bigger and consolidate the industry and move into NSW through a large acquisition,” Gomes explained.

“They retreated from that, they’ve repaired their balance sheet by selling those assets and they’re now just going back to their knitting, which is mostly southern state-based community-based clinics.”

According to Gomes, both Capitol and Integral have a “hub-and-spoke” strategy, where they have a few community-based clinics that have high-end diagnostic imaging equipment and a bunch of others that do the lower priced standard tests.

Melbourne-based Integral provides diagnostic imaging services through a network of 45 sites, including 12 hospital sites, and operates under different brands: Lake Imaging, South Coast Radiology, Global Diagnostics and Western District Radiology.

“They’re both interesting businesses and they’re both trading at discounts to the market,” Gomes said.

“Despite the fact the economic outlook looks very uncertain these are businesses that have some degree of defensive qualities to them.”

Victor Gomes is a co-founder of Eiger Capital and portfolio manager for the Eiger Australian Small Companies Fund. Prior to establishing Eiger, he worked on the UBS Australian Small Companies Fund since 2011. Prior to this, he worked at fund managers including BT Investment Management, Platinum, Hayberry & Selector.