Akumin has an 89 per cent upside, says Clarus Securities

Clarus Securities analyst Noel Atkinson still likes what he sees out of medical imaging company Akumin (Akumin Stock Quote, Chart, News, Analysts, Financials NASDAQ:AKU). In an update to clients on Tuesday, Atkinson strongly reiterated his “Buy” rating and target price of $6.00/share, which at the time of publication represented a projected one-year return of 89.3 per cent.

Headquartered in Plantation, Fla., Akumin owns, operates or manages over 130 independent freestanding medical imaging centres with CT, MRI, PET, ultrasound, mammography, X-ray and other medical imaging capabilities in seven U.S. states.

Akumin is getting close to finalizing its plan to acquire Alliance Healthcare Services, a California-based provider of radiology and oncology services for hospitals, health systems and physician groups. In a recent update on the pending acquisition, Akumin said it plans to finance the majority of the deal using $500 million in senior secured notes, to be placed in escrow and returned with interest if the deal is not completed by January 24, 2022.

“Although AKU was placed under review by the major debt rating agencies because of the pending deal, Alliance is a large and highly profitable business, and Akumin’s existing $475 million of seven per cent, five-year senior notes continue to trade above par, so we expect Akumin to be able to get similar terms (i.e., seven per cent on five-year term) for this tranche,” Atkinson wrote.

“Completion of the notes offering should ease two of the most common investor concerns over the Alliance acquisition – interest cost and warrant dilution as it relates to the 11 per cent note tranche backstop being provided by private equity partner Stonepeak,” Atkinson said.

The acquisition will also mean change in the company’s corporate structure with Akumin’s current president and CEO, Riadh Zine, becoming Akumin’s co-CEO and chairman, while Alliance President & CEO Rhonda Longmore-Grund will become the other co-CEO.

“We have always said Akumin’s vision is to drive patient-centered innovation, service delivery standardization, and exceptional healthcare value, all in an outpatient care setting,” Zine said in the company’s June 25 press release. “The acquisition of Alliance is transformative in a changing healthcare ecosystem that continues to shift toward outpatient, price-transparent, value-based care. There’s no other organization that has the complement of attributes we will offer together as outpatient healthcare services experts, in particular with Alliance’s longstanding hospital and health system relationships and Akumin’s freestanding operational expertise.”

For the time being, Atkinson’s financial outlook on Akumin remains unchanged from his previous analysis, as he still projects company revenue to total $301.3 million in 2021, a $50 million uptick from the reported 2020 revenues with room to grow to an estimated $329.7 million by 2022, though those numbers do not yet include Alliance revenue projections. (All figures in US dollars.)

He also foresees the company’s adjusted EBITDA growing simultaneously, with a forecast of $66.2 million in play for 2021, good for a 22 per cent adjusted EBITDA margin. For 2022, Atkinson sees the margin growing to 26 per cent at an estimate of $84.1 million.

Atkinson also foresees valuation ratios either remaining unchanged or dropping for Akumin, projecting the price-sales ratio to be 0.7x for both 2021 and 2022, while he forecasts the EV/EBITDA multiple to drop from a projected 8.7x in 2021 to 6.8x by 2022, and the price-earnings ratio is forecast to drop significantly, moving from an estimated 59.2x in 2021 to a projected 16.6x for 2022.

In addition to the pending Alliance acquisition, Akumin has also partnered with Philips to deploy Philips’ new Radiology Operations Command Center across Akumin’s outpatient imaging centres and co-create clinical standards for Akumin’s MR and CT imaging modalities to improve the access, quality, and productivity of Akumin’s outpatient imaging center network.

“We are very excited to partner with Philips on this important strategic initiative to standardize the delivery of clinical care to our patients, while ensuring business continuity, improving ‘first time’ image quality, and increasing our clinical personnel productivity,” Zine said on June 2.

While the Alliance acquisition has triggered some concern from investors pertaining to company debt ratings, Atkinson remains optimistic for the future, noting the current share price as an attractive entry point.

“We still see the potential for AKU shares to re-rate to US$9-11 range (9-10x EV/combined 2022e Adj. EBITDA using LTM + synergies for Alliance),” he said. “We will wait for standard federal antitrust review completion before adding Alliance to our estimates. RDNT continues to trade at a massive valuation premium to Akumin, even more so when Alliance is included.”

Comparing AKU to its peers, the analyst estimated the group of U.S. providers of diagnostic medical testing services to be currently trading at an average of 10.3x 2021 EV/EBITDA estimates and 12.1x 2022 estimates, with close competitor RadNet currently at 12.6x and 11.9x, respectively. By contrast, Atkinson pegs Akumin at 9.0x and 7.1x, respectively.

“We expect to add Alliance to our model (and revisit our target price) once the Alliance deal clears HSR anti-trust review,” Atkinson wrote. “We believe Akumin’s share price reflects a very attractive entry point, and we strongly reiterate our Buy rating.”

Akumin closed Tuesday trading at a price of $3.15/share on the NASDAQ, down a cent from its Monday close.