ASX healthcare shares finished in the red on Friday, with the S&P/ASX 200 Health Care Index (ASX: XHJ) falling 1.11% while the S&P/ASX 200 Index (ASX: XJO) also tumbled 0.5%.
In a recent note, fund manager IML identified three small-cap ASX healthcare shares that it rates a buy.
IML invests in quality companies offering good value now, with the potential for attractive long-term returns and lower volatility than the market average along the way.
Small-cap stocks have a market capitalisation of between a few hundred million dollars to $2 billion. They are smaller up-and-coming companies that are still in growth mode and typically don't pay dividends.
Let's check out the three small-cap ASX healthcare shares that IML has its eye on.
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3 ASX healthcare shares tipped for growth
IML Portfolio Manager Marc Whittaker says there are attractive long-term investment opportunities in the small-cap healthcare space.
He has revealed three high-quality ASX stocks "with strong prospects trading at reasonable valuations".
Australian Clinical Labs Ltd (ASX: ACL)
This ASX healthcare share has risen 21% in the year to date and closed at $3.57 on Friday.
Whittaker expects a lift in the share price of this ASX healthcare stock as the pathology provider's performance continues to improve.
He says:
ACL, and many other healthcare stocks, have been suffering from low GP visitation since Covid. We have finally seen GP visitations recover, which has meant more referrals for pathology, but also radiology and other medical tests.
This has directly benefitted ACL which reported that its revenue grew 7 to 8% over the past year and it expects revenue to grow at a similar rate of 5 to 6% next year.
For a company like ACL revenue growth is particularly encouraging because around 70-80% of its costs are fixed, so a significant percentage of increased revenue flows through to profit.
Whittaker says the buyback over the next 12 months "should provide a further boost to its share price".
Regis Healthcare Ltd (ASX: REG)
This ASX healthcare share has risen 97% in the year to date and closed at $6.40 on Friday.
One of Australia's largest aged-care operators, Regis is set to benefit from the Federal Government's proposed new Aged Care Act.
Whittaker says Regis has remained profitable while many other aged care providers have not. Improved government funding and Australia's ageing population are significant tailwinds for the business.
He comments:
Current occupancy for Regis sits at 95%, a level last seen around 2015. Back then its operating margins were over 20%, whereas right now they are at 10.5%.
While it will be difficult for Regis to return to those margin levels – the sector now rightly bears significantly greater compliance, reporting and staffing requirements – we expect its margins to move from the current 10.5% to around 12% to 15% over the next couple of years.
It also has a strong balance sheet, which leaves it well placed to grow through acquisition as we saw recently with its purchase of two new aged care homes.
Integral Diagnostics Ltd (ASX: IDX)
This ASX healthcare share has risen 55% in the year to date and closed at $2.99 on Friday.
As one of Australia's largest diagnostic imaging providers, Integral Diagnostics has faced cost pressures and a lower rate of GP referrals over the past two years.
But Whittaker says things are changing, commenting:
Like ACL, the increase in GP radiology referrals is seeing higher volumes. Additionally, a continued mix shift in radiology work towards higher value and higher margin imaging such as CT and PET scans, as well as higher government indexation on Medicare radiology benefits, allowed IDX to report improved margins in its latest result.
IDX's balance sheet is also improving. Two years ago, it was close to three times net debt to EBITDA and now it is at around two and a half times.
Whittaker is confident the company can continue to grow its revenue at 5% to 8% and reduce its cost growth to about 4% to 5% to increase margins and reduce debt.
He also points out that Integral has a high percentage of fixed costs, so more of the revenue boost would flow through to profits.
