Goldman Sachs has just slapped buy ratings on these ASX healthcare shares

These healthcare shares could offer sizeable returns according to one broker.

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If you're wanting exposure to the healthcare sector, then it could be worth listening to what Goldman Sachs is recommending at this side of the market.

It has been looking at the services side of the sector and has picked out two ASX healthcare shares as buys.

The two companies in question are Capitol Health Ltd (ASX: CAJ) and Integral Diagnostics Ltd (ASX: IDX), which the broker notes provide exposure to structural growth in radiology at attractive valuations.

In respect to valuations, Goldman highlights:

Lowest growth-adjusted valuations across our coverage. We forecast 3Y EBITDA CAGRs (FY23-26E) of 12%/16% for CAJ/IDX respectively (vs ANZ HC coverage +12%). CAJ/IDX trade at growth adjusted multiples of 0.7x/ 0.6x, and screen as the mostly attractively valued across our coverage (1.9x).

Goldman also notes that the industry is highly fragmented, which provides consolidation opportunities. This could see both companies become either acquirers or takeover targets. It adds:

Long-term outperformers are those with leading operating efficiency and capital deployment strategies. A fragmented industry (top 6 players account for c.57% of market) provides opportunities for consolidation (given the scale benefits and potential revenue/cost synergies) as both an acquirer and target.

Strong returns on offer with these ASX healthcare shares

Now let's see what returns Goldman thinks could be on offer with these ASX healthcare shares.

For Capital Health, the broker has initiated coverage with a buy rating and 33 cents price target on its shares. This implies potential upside of 18% from current levels. Goldman is also forecasting a 3.7% dividend yield in FY 2024. Goldman adds:

CAJ is the sixth largest player in a structurally attractive industry and is a low cost community-based provider of radiology (underpins stable and defensive cash flows that are 77% government backed). A healthy balance sheet provides flexibility, and we believe its 7x NTM EBITDA multiple is attractive on a growth-adjusted basis (and relative to recent transaction multiples at c.13-14x).

As for Integral Diagnostics, its analysts have a buy rating and $3.70 price target on its shares. This suggests potential upside of 14% for investors. It also expects a 3.4% dividend yield in FY 2024. The broker adds:

We believe the market is under-appreciating the recovery in margins given our positive outlook on price/mix tailwinds/cost discipline. We forecast EBITDA margins of 20% in FY23E, recovering to 25% by FY26 (+180bps above consensus). IDX trades on 9x NTM EBITDA, vs our forecast 16% 3Y CAGR (most attractive vs coverage 21x/12%).

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Integral Diagnostics. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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