Akumin is undervalued, Clarus Securities says

The stock has not done too well this year, but going forward, investors should expect better from Akumin (Akumin Stock Quote, Chart, News, Analysts, Financials NASDAQ:AKU), according to Clarus Securities analyst Noel Atkinson, who updated clients in a report on Wednesday. Atkinson said the medical imaging and diagnostics company has been trading at a sharp discount to its closest peer, radiology company RadNet but the analyst thinks that gap should start shrinking.

Florida-based Akumin is a provider of freestanding, fixed-site outpatient diagnostic imaging services with a network of imaging centres in the states of Florida, Texas, Pennsylvania, Delaware, Illinois, Kansas and Georgia. The company has 134 imaging centres, providing CT, MRI, PET, ultrasound, mammography, X-ray and other medical imaging capabilities.

Akumin’s business was negatively affected by COVID-related lockdowns through 2020, with its revenue showing a slight increase to $251 million for the year compared to $247 million for 2019. At the same time, the company grew its relative value units (RVUs), a measure of procedure volume, to 5,642,000 for 2020 compared to 5,247,000 in 2019. (All figures in US dollars.)

But management says business is looking better in 2021, while at the same time the company continues to remain active on the M&A front, in May closing on two acquisitions for a total of seven new imaging centres in Florida to bring its total in the state to 79.

“With the successful integration of our prior acquisitions over the 2020 year and with volume having returned as the effects of the pandemic wane, we are excited to continue our acquisition and organic growth strategies over 2021 and beyond,” said Riadh Zine, President and CEO of Akumin, in a May 17 press release.

For Atkinson, one of the biggest conundrums about Akumin is how the stock has traded this year in comparison to RadNet. Where AKU is now down eight per cent for 2021, RadNet is up a sparkling 66 per cent, making for a 74 per cent relative outperformance by RadNet shares, with much of that widening gap coming in the current quarter.

RadNet, whose core market includes California, Maryland, Delaware, New Jersey, New York and Arizona, with currently 346 outpatient centres, has had a few things going for it more recently which Atkinson said are likely drivers of the share price rise and related distancing from AKU. For one, RadNet had a $725-million debt issuance that termed out most of its debt to 2028, which lowered annual interest payments and brought on over $100 million in cash to the balance sheet for future M&A. RadNet also had a strong first quarter, where management increased its 2021 guidance for revenue, adjusted EBITDA and free cash flow. Finally, Atkinson pointed to a potential demand for PET scanning due to the recently-approved Alzheimer’s drug Aduhelm which requires PET scans to track patients’ response, with RadNet currently having PET scanners and/or nuclear medicine capabilities at about 20-25 per cent of its centres.

But all that doesn’t justify the valuation gap, according to Atkinson.

“Akumin is a top-three operator in terms of number of clinics in the U.S. and has very little geographic overlap with RadNet (only really in Delaware and a few small cities along the Atlantic coast of Florida). Akumin’s core portfolio is also performing well, with strong recovery in March 2021 to largely pre-Covid levels. The Company has also successfully refinanced its debt with much fewer covenants and boosted funding for acquisitions. Akumin also has PET scanners at 13 clinics including at least 11 locations in its key Florida market,” Atkinson wrote.

The analyst pointed to two possible concerns from institutional investors, namely, a purported lack of free cash flow on Akumin’s part and a higher leverage currently carried by Akumin compared to RadNet.

On the first charge, Atkinson said even considering the COVID impact on 2020’s billing volumes, crunching the numbers doesn’t work. Atkinson puts AKU’s 2021 projected FCF margin at 5.1 per cent, which is not so much lower than RadNet’s guidance for 5.8 per cent. Meanwhile, for 2022, the analyst sees Akumin pulling ahead, hitting 8.8 per cent FCF yield versus only 6.8 per cent for RadNet.

On the debt comparison, Atkinson says Akumin’s leverage ratio sits at 5.3x net debt/2021 adjusted EBITDA, which is definitely above the estimated 3.1x for RadNet. Still, Atkinson argued Akumin’s greater leverage itself doesn’t warrant the current valuation gap, and combined with AKU’s better adjusted EBITDA margin and comparable FCF, you have a good case for shrinking the gap between the two names.

“We think a reasonable spread is 1.5x-2.0x on 2022e EV/Adj. EBITDA multiples,” Atkinson wrote. “That spread would reflect RDNT’s larger scale and lower leverage, offset somewhat by AKU’s faster expected revenue growth in 2021 and 2022 as well as superior Adj. EBITDA profitability. It would also equate to an AKU share price in the $6.00 range – matching our target price.”

With the report, Atkinson has “strongly reiterated” his “Buy” rating to go along with the maintained $6.00 target, which at the time of publication represented a projected 12-month return of 117.4 per cent.