Integral Diagnostics Limited Company Valuation Report Group Assignment 1

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IDX.AX OVERVIEW

EXECUTIVE SUMMARY

Date

14/09/2021

Ticker

IDX.AX

Stock Exchange

Australian Stock Exchange

Close Price (as of 14/09/2021)

$4.71

Shares Outstanding

198,628,698

Market Capitalisation

$935,541,167.58

Target Price

$5.38

Sector

Healthcare

Industry

Medical Diagnostic Imaging

6 5 4 3 2 1 0

7,750.00 6,750.00 5,750.00 2021

2020

2019

2018

2017

2016

4,750.00

IDX ($AUD)

8,750.00

S&P/ASX 200

IDX

Sources: Yahoo Finance & Investing.com

Shareholder Overview 6.6%

The report utilises company, industry and peer group, DuPont ROE, macroeconomic and microeconomic, and technical, analysis methods, along with, DDM, FCFE and relative valuation methods, to evaluate IDX, and is finalised with a price evaluation and discussion.

IDX is leveraging both organic and inorganic growth strategies to expand its business. They are also committed to being a socially responsible company. IDX is the fourth largest company in their industry yet are an industry leader based on their financial ratios. IDX has been returning strong consistent returns to their shareholders and is an attractive risk-adjusted investment, as measured by ROE. Medical diagnostic imaging is a resilient sector even in a potential high inflation environment and is support by an aging Australian population. IDX is an innovative company adopting AI technology and creating opportunities for international expansion in the year to come.

Relative Price History S&P/ASX 200 ($AUD)

Integral Diagnostics Limited (IDX) are a leading Australian and New Zealand medical imaging company. This report provides a recommendation of whether investors should buy, sell, or hold the stock.

Viburnum Funds Pty Ltd 5.0% 4.1% 1.9% Perennial Value 1.6% Management Ltd. Norges Bank Investment Management (NBIM) Ansley (Peter J)

80.8% The Vanguard Group, Inc. Other

DDM was found to be an unreliable model, the contrary for FCFE. Technical analysis pointed toward potential buy signals and the FCFE model and sensitivity analysis confirmed this, implying an intrinsic value of $5.38, presenting a 14% undervaluation based on the closing price of $4.71 (14/09/21).

Therefore, a buy recommendation has been established for IDX, representing the expectation of materially positive returns over the next six to twelve months.

TABLE OF CONTENTS EXECUTIVE SUMMARY ................................................................................................................................. 1 TABLE OF CONTENTS.................................................................................................................................... 2 INTRODUCTION .......................................................................................................................................... 3 COMPANY ANALYSIS (INCLUDING ESG FACTORS) ......................................................................................... 3 INDUSTRY AND PEER GROUP ANALYSIS........................................................................................................ 4 DUPONT ROE CALCULATIONS AND ANALYSIS ............................................................................................... 5 MACRO AND MICRO ECONOMIC ANALYSIS .................................................................................................. 6 VALUATION ................................................................................................................................................. 8 TECHNICAL ANALYSIS ................................................................................................................................. 11 PRICE EVALUATION AND DISCUSSION ........................................................................................................ 13 CONCLUSION AND RESTATEMENT OF RECOMMENDATION......................................................................... 14 LIST OF REFERENCES .................................................................................................................................. 15 LIST OF APPENDICES ................................................................................................................................. 17 APPENDIX A INDUSTRY AND PEER GROUP ANALYSIS ............................................................................... 18 APPENDIX B DUPONT ROE CALCULATIONS .............................................................................................. 19 APPENDIX C1 CAPM CALCULATIONS ........................................................................................................ 20 APPENDIX C2 TERMINAL GROWTH .......................................................................................................... 21 APPENDIX C3 DIVIDEND DISCOUNT MODEL ............................................................................................. 22 APPENDIX C4 FREE CASH FLOW TO EQUITY MODEL ................................................................................. 22 APPENDIX C5 SENSITIVITY ANALYSIS ....................................................................................................... 23 APPENDIX C6 RELATIVE VALUATION ........................................................................................................ 23

INTRODUCTION IDX are a leading Australian and New Zealand radiology and medical imaging company, garnering approximately 6.2% of the industry (Johnson 2021).

This report provides an assessment of the company's current position and future prospects. It incorporates various valuation techniques to arrive at estimates of the intrinsic value of the company's ordinary shares. Ultimately, this report provides a recommendation of whether investors should buy, sell, or hold the stock, based on the expected returns in the next six to twelve months.

COMPANY ANALYSIS (INCLUDING ESG FACTORS) IDX is a public company providing quality medical imaging services across Australia and New Zealand. They provide their services across 67 clinics and pride themselves on being able to provide high quality and easily accessible services. IDX was registered in April 2008 and listed on the ASX in October 2015. Since then, IDX has continued to deliver strategic organic growth (Integral Diagnostics 2021, p 6). IDX have acquired several radiology, health services and medical imaging clinics, to inorganically expand their business and unlock untapped synergies and economies of scale. Some of IDX’s biggest ventures include: x x x x

the purchase of Western District Radiology and South West MRI for $5 million in May 2016, the acquisition of Imaging Queensland for $104 million in August 2019, the acquisition of Ascot Radiology in New Zealand for NZD 50 million, and the announcement of ‘MedX’, a teleradiology joint venture with UK company Medica UK, positioning IDX for outer APAC expansion in the long-term.

Through FY21 IDX participated in several acquisition processes that were not executed, due to the high acquisition multiples of available offers, this has caused IDX to focus on organic growth through greenfield and brownfield expansions (Integral Diagnostics 2021, p 10). Dr Ian Kadish (IDX’s CEO) defines brownfield expansions as adding technology to existing sites, and greenfield as the opening of new clinic locations. Some examples of brownfield and greenfield expansions through 2H FY21 include: x x

installations of new MRI machines in the Gold Coast, Toowoomba and Busselton, and, a completed new development site as well as a new commenced site in the Gold Coast.

IDX is expected to continue utilising its organic and inorganic mixed growth strategy into the foreseeable future, adapting based on the best available market opportunities. On top of this, while the teleradiology joint venture is not expected to impact earnings in the near term, it will enable IDX to expand both its reach and technology-driven services in the long term.

ENVIRONMENT IDX has committed to minimising its environmental footprint. Assessments were conducted on their greenhouse gas emissions in the past two financial years to use these results as a baseline for future years. Results have already improved based on their increase in environment pillar score from 2019 to 2020. IDX aim to achieve ‘As Low As Reasonably Achievable (ALARA) waste when it comes to their imaging radiation doses and radioactive waste, and a newly established waste management committee will ensure that waste is minimized (Integral Diagnostics 2021, p.10).

SOCIAL IDX pride themselves on their social value of ‘everyone counts’. This perspective ‘…enables us to create a work environment where our people can belong, thrive and achieve together in an inclusive and safe workplace’ (Integral Diagnostics 2021, p.11). One concern may be IDX’s higher employee turnover in 2021, however, this has been identified as an area for improvement. Positively, IDX has implemented a professional development framework during 2021, which aims to better the planning of business performance, practices and feedback. Through 2021, IDX has also met their goal of 30% women representation for the Board and Senior Management.

IDX ESG Score 60 50 40 30 20

10 0 2019

2020

Governance Pillar Score (Weight 37.0%) Social Pillar Score (Weight 44.5%) Environmental Pillar Score (Weight 18.5%)

GOVERNANCE IDX ‘…has adopted a system of internal controls, risk management processes and corporate governance policies…’ to promote business success (Integral Diagnostics 2021). The board has ensured compliance with the ASX Corporate Governance Council’s Principles and Recommendations and formed an ESG committee during Corporate Governance Council’s Principles and Recommendations, and formed an ESG committee during 2020.

This has ensured all ESG factors undergo perpetual improvement. Reflected in their governance pillar score from 2019 to 2020.

Industry Market Share 6.2%

Integral Diagnostics Limited (IDX) I-MED Network Pty Limited Sonic Healthcare Limited (SHL) Healius Limited (HLS) Capitol Health Limited (CAJ) Other

15.2% 13.0%

52.4%

9.2% 4.0%

100% 95% 90% 85% 80%

Gross Profit Margin

2017 2018 Integral Diagnostics Capitol Health

20% 10% 0% -10% -20%

2019

INDUSTRY AND COMPETITIVE LANDSCAPE IDX operates within the diagnostic imaging services industry. IDX’s industry is considered domestic-focused, given its focus on Australia and New Zealand. However, they may be moving their focus globally, due to the recent joint venture with Medica UK. The major competitors have been chosen based on their market share. Companies compete based on their ability to acquire more clinics and attract patients.

IDX is a major competitor in the industry, dominating 6.2% in Australia, but their competitors currently obtain larger shares. I-MED is a proprietary company which focuses their medical imaging primarily within Australia and the UK and are the largest individual domestic company, dominating 15.2% of sales in the industry (IBIS World 2021). Healius pride themselves on their Australia wide coverage. and primarily focus on imaging, currently controlling 9.2% of the industry (IBIS World 2021). Capitol operates solely in Australia, providing imaging and other services. They pride themselves on being community-focused and currently pursue 3-4% of the industry (IBIS World 2021). ‘Sonic is the world’s third largest provider of pathology/clinical laboratory services…’, making them more globally focused, dominating 13% of the industry in Australia (Sonic Healthcare 2021) (IBIS World 2021).

HISTORICAL PEER GROUP FINANCIAL PERFORMANCE Competitors have been analysed in comparison to IDX based on five financial ratios: Gross Profit Margin, Pretax Return on Assets (ROA), Current Ratio, Debt to Equity Ratio, and Inventory Turnover, to assess financial performance.

Pretax Return on Assets

As I-MED Radiology is a public unlisted company, their specific ratios are unavailable. I-MED will still be analysed due to their industry presence. For Capitol Health, inventory turnover totals were not publicly available, therefore, Inventory Turnover was not calculated.

2017 2018 Integral Diagnostics Capitol Health

2019

2020 2021 Healius Sonic Healthcare

2017 2018 2019 Integral Diagnostics Capitol Health

2020 2021 Healius Sonic Healthcare

Inventory Turnover

2017 2018 2019 Integral Diagnostics Sonic Healthcare

2020 Healius

2017

2018

Integral Diagnostics Capitol Health

2019

2020

For current ratio, all companies are under the industry average, indicating low liquidity. This aligns within this industry, as companies rely more on non-current assets and liabilities.

The debt-to-equity ratio is similar for all companies. IDX should be most worried as their ratio sits higher than 1, indicating a higher reliance on debt. However, based on the assets required to conduct business, this level is still reasonable.

Inventory turnover for IDX is higher than their competitors, due to their young age. As they are still building clientele, high inventory turnover is normal. A solid sign is that it decreased during the period, indicating that their business is slowly improving.

2021

Debt/Equity Ratio

1.5 1.0 0.5 0.0

Each of the competitors is above average gross profit margin. IDX’s ratio is much higher in comparison to its competitors, due to their rapid clinic acquisition and organic growth projects.

For ROA, all companies experienced high fluctuations from 2020 to 2021, due to the Coronavirus pandemic. However, IDX’s ratio remained similar during this period, likely due to their presence in New Zealand who only shut businesses for a short period brief period. Sonic Healthcare had their ratio more than double in 2021, due to their acquisition of a US company, allowing them to break into overseas markets.

Current Ratio

5 4 3 2 1 0

30 20 10 0

2020 2021 Healius Sonic Healthcare

INDUSTRY AND PEER GROUP ANALYSIS

2021

Healius Sonic Healthcare

DUPONT ROE CALCULATIONS AND ANALYSIS

ROE of Each Company

A DuPont ROE analysis has been conducted for both IDX and its peers (relevant calculations and methodology in Appendix B). The three components of the DuPont ROE include net profit margin, asset turnover and financial leverage.

10% 0%

OVERVIEW OF ROE PEER COMPARISON

-10% -20% 2017 2018 2019 2020 2021 Integeral Diagnostics Healius Ltd Capitol Health Sonic Healthcare

Net Profit Margin of Each Company 15.0% 5.0% -5.0% -15.0% -25.0% 2017

2018

2019

Integral Diagnostics Capitol Health

2020

2021

Healius Ltd Sonic Healthcare

IDX has experienced a trend of consistency in their ROE, from 7.8% in FY17 to 6.1% in FY21, peaking at 12.1% in FY21. Capitol Health has constantly lowered its ROE. Healius have had huge volatility, with tops of 2.3% and lows close to -20%, eliminating them from the competition. Sonic Healthcare has delivered ROEs that underperformed compared to IDX in four of the five previous FYs. Sonic has only just begun competing with IDX, surpassing its ROE through FY21. Nonetheless, IDX’s proactive growth prospects are expected to position them as the consistent leader in the future.

NET PROFIT MARGIN (NPM) IDX has had impressively consistent NPMs throughout the last 5-years. With a low of 8% and a high of , investors can be confident in IDX’s management. As NPM is a key driver of DuPont ROE, the trends observed in the ROE are largely observable through NPM. Again, due to Healius and Capitol Health’s unpredictability, Sonic Healthcare appears to be IDX’s main competitor.

With a low of 7.8% and a pre-FY21 high of 9%, historically Sonic seems to trail slightly behind IDX. While Sonic outperformed IDX through FY21, IDX’s proactive growth prospects are expected to position them back as the consistent leader in the future.

ASSET TURNOVER Healius must be recognised for its high-performing asset turnover, however, its overall ROE is too poor to make it an attractive investment. IDX’s ratio through FY17 to FY19 had an exceptional return on its assets. From FY19 to FY21, IDX has converged to a more reasonable ratio, just below the 5-year peer average of 0. . Through this same period, IDX’s peers have converged to similar performances. Through the coming 5-years, IDX’s aggressive growth plans are projected to enable them to surpass the peer average, making the company highly attractive.

Asset Turnover Of Each Company 1.2 1

FINANCIAL LEVERAGE

0.8 0.6

0.4 2017

2018

2019

Integral Diagnostics Capitol health

2020

2021

Healius Ltd Sonic Healthcare

Financial Leverage of Each Company 1.60 1.40 1.20 1.00 0.80 0.60 0.40 2017

2018

Integral Diagnostics Capitol Health

2019

2020

2021

Healius Ltd Sonic Healthcare

IDX has historically continued to increase its financial leverage as part of their growth funding strategy. IDX has also reduced its exposure through the pandemic whilst also having available funds for growth. Prospecting investors should not be concerned by IDX’s leverage as it is expected to drive strong growth into the near to mid-term, and IDX continues to have a dependable plan in place to ensure this (see company analysis). In contrast, Healius, also have constantly high financial leverage which they are only now reducing. This makes Healius a highrisk investment. Both Capitol and Sonic have kept low leverage ratios, which while reducing risk, making them vulnerable.

MACRO AND MICRO ECONOMIC ANALYSIS Proportion of Population Aged 65 Years & Over

MACROECONOMIC LEVEL Through the pandemic, Australia’s real GDP dropped significantly from just above 2 to –2% in FY20, yet FY21 saw a strong 4% recovery. Healthcare is the largest sector of the Australian economy, making up 10% of total GDP (ABS 2021). The sector is also the nation's largest employer, making up 12.6% of Australia’s working population (ABS 2021).

15% 10%

Medical imaging fees are expected to continue increasing well above the CPI Index (inflation).

This means that even if a high inflation environment emerges in the mid-term, companies in this industry are well placed for inflation protection.

5% 0% 2000

2005

Aged 65-84

2010

2015

Aged 85 and over

2020

Over the past 20-years, Australia has seen a growing ageing population, from people over 65 representing 12% of the population in 2000 to 16% in 2020, and this is expected to continue (ABS 2020). This will cause further demand for medical diagnostic services and is a powerful driving force for the industry.

MICROECONOMIC LEVEL IDX’s objectives are to ensure patients come first, embrace change, create value, and that people feel valued. IDX has put this into action through investing in COVID-19 safe practices, initiating the development of subspeciality workflows, addressing their carbon footprint, and acquiring new businesses. These objectives and actions are expected to propel IDX’s earnings through the short to mid-term.

For financials, though IDX experienced difficulties through the pandemic, it maintained its competitive net profit margin. Impressively, IDX increased its net profit by 9.5% from FY19 to FY20 and 36% in FY21, ensuring expenses are kept low while maximising revenues through organic and inorganic growth (Integral Diagnostics 2021).

Looking at the competition, IDX must keep track of what their peers are doing in terms of prices, research and development, and financial performance. IDX ensures they can define their position in the market and take advantage of their competitors’ weaknesses.

SWOT ANALYSIS Strengths: IDX has high-quality services and is always updating its equipment to ensure customers receive the best possible services. This commitment is all part of their brownfield expansions which has driven powerful goodwill for the IDX brand. IDX has also been an industry leader in innovation. Three years ago, IDX implemented the first radiology Artificial Intelligence (AI) solutions in Australia (Integral Diagnostics 2021). These solutions improved quality and workflow while saving lives. IDX only selects the best AI products offered in the international radiology market (Integral Diagnostics 2021). Another raw strength of IDX is its drive for growth.

Weaknesses: IDX is a major competitor in the industry, with a 6.2% Australian market share, however, some competitors currently hold larger shares. A flow on effect of this is that Sonic Healthcare has unique economies of scale, with a 13% market share (IBIS World 2021). This is a likely explanation of Sonic’s margin outperformance of IDX in terms of net profit margin. IDX is mitigating this weakness with its aggressive growth strategies, likely to materialise in the mid-term.

Opportunities: Australia’s demand for medical imaging is only growing, due to Australia’s continually aging population. This is expected to be a strong driving force of growth for the industry, and IDX, through its tactical growth strategy, is well placed to leverage this force. IDX’s innovative culture has enabled them to find both a new product segment and market through their joint venture with Medica UK. This strategy allows IDX to grow the new, teleradiology division while beginning to unlock access to the UK markets. Although the venture is not projected to impact earnings in the short term, it is a step forward in expanding IDX’s reach (Integral Diagnostics 2021).

Threats: An important aspect of government policy affecting IDX’s financial performance is Medicare funding. Through FY21, there was a 0. indexation provided by Medicare Australia. A disappointing reality for the firm as during the same period the CPI was several times higher at 3.8%, and the Health CPI up 4.8% (Integral Diagnostics 2021). This threat is mitigated by IDX in that they provide essential services which have strong demand, this acts as a shield from this important healthcare metric. Some investors are concerned about a slowing domestic economy and this protects IDX from this potentially significant threat.

PORTER S ANALYSIS Legend 1) Insignificant Threat 2) Low Level Threat 3) Moderate Threat 4) Material Threat 5) Significant Threat

Bargaining Power of Suppliers

3 Threat of New Entrants

Rivalry Among Existing Firms 2

1 1 3

Threat of Substitute Products

Bargaining Power of Buyers

Porter s Fi e Forces Radar Chart Source: Team Analysis

Threat of Substitute Products: There are no real substitutes for the medical diagnostic machines required for patients. However, some new referral practices have arisen in New Zealand where hospitals and referrers own equity interests in radiology equipment. Due to the clear conflict of interest, IDX expects that payors and regulators will review these practices and undertake the necessary actions to manage this. Similar developments could arise in Australia however the current legislative landscape, the Medicare legislation and MRI license regimen offer some protections for patients and payors (Integral Diagnostics 2021).

Threat of New Entrants: In the medical diagnostic imaging industry, large financial resources are required to compete as the machines and technology is highly sophisticated and expensive. Distribution channels are also very difficult to build up without large starting capital and momentum.

If these factors would not deter new entrants, the powerful economies of scale that are unlocked among the top five competitors ensure that barriers are high.

Bargaining Power of Buyers: IDX’s buyers do not make up large portions of their sales, nor widely know of IDX’s profits (despite public availability).

Due to the high barriers to entry, buyers neither have many options between firms. These factors, on top of increasing demand for services and their essential nature, lead IDX’s buyers to have little to no bargaining power.

Bargaining Power of Suppliers: Due to the niche nature of medical diagnostic imaging technology, there is not a large pool of suppliers to select from. This equipment is also a critical input for IDX’s business, not being able to operate nor expand without them. That said, the niche nature also means that suppliers cannot supply multiple industries and are dependent on the firms to continue upgrading and purchasing new technology. The bargaining power is relatively even between the two, which is slightly more power with suppliers.

Rivalry Among Existing Firms: In general, because the industry is in a rapid growth stage, firms are not concerned as much about stealing market share from one another, but rather widening the reach of their businesses. That said, due to high fixed costs, exit barriers, specialized assets, and the five relatively large peers, there will undoubtedly be rivalry in the mid-to long term.

Valuation Matrix

Model Dividend Discount Model Free Cash Flow to Equity

Weighting

Share Price

0%

$3.60

100%

$5.38

Target Price

$5.38

Current Price (14/09/2021)

$4.71

Implied Upside

14%

VALUATION Our buy recommendation for IDX comes with an implied target price of $5.38, presenting a 14% undervaluation on the closing price of $ . 1 (1 /0 /2021). The intrinsic price valuation for IDX’s stock is calculated as the implied share price produced by the FCFE model (See ‘Price Evaluation and Discussion’ section). To confirm the robustness of the FCFE valuation, a sensitivity analysis has been performed. Our analysis also includes a relative valuation, which represents IDX as somewhat fairly valued compared to its peers. That said, we believe this is explained by IDX’s greater expected returns in the mid to long term.

CAPM EXPECTED RETURN CAPM Expected Return Inputs

Input

Source

Rate

Risk Free Rate

10-Year Australian Government Bond Bid Yield (18/08/2021)

1.13%

Beta

OLS Regression

0.79

Expected Market Return

Canstar

8..90%

A crucial variable of any discounted cash flow model is the discount rate. The Capital Asset Pricing Model (CAPM) has been utilised as the method of deriving the discount rate (expected return) for IDX shares; 7.27% (Appendix C1). This is used for both DDM and FCFE.

TERMINAL GROWTH The estimated terminal growth rate for IDX of 2.36% after FY26, for both DDM and FCFE valuations, coincides with the assumption that the firm's long-term growth rate will converge with the aggregate growth of the overall economy. This was quantified by calculating the annual average GDP growth of Australia over the recent 10-year period, resulting in the 2.36% perpetual growth rate (The World Bank 2020).

DDM VALUATION Market Risk Premium

Expected Market Return subtract Risk Free Rate

CAPM E(R)

7.77%

7.27%

Forecasted Revenue Growth 60% 50% 40% 30% 20% 10% 0%

The Dividend Discount Model (DDM) determines IDX's intrinsic value based on the accumulated present value of all the company's future dividend payments. The other crucial variable of any discounted cash flow model is the growth rates.

One method is to use the ‘sustainable growth rate’ (SGR), as IDX has high leverage, with a Debtto-Equity Ratio of 1.21 in FY21, this method is not a good estimator. Using this method IDX’s SGR is only 1.07%. IDX has not relied solely on the group’s internally generated revenue to fund its growth in the past and is not expected to do so in the future.

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026

Average historical DPS growth is also an ineffective proxy. The 5-year average is 28.9%.

Importantly, only half a year’s dividends were paid in FY16, and so the FY17 growth is exceptionally high, this results in a skewed and ineffective average. A 4-year average can be taken to avoid this; 17.3%. Due to the dividend payment growth variability and the lack of further historical dividends, the 4-year average likewise appears unreliable.

Revenue Growth 5-Year Average Forecast Expon. (Revenue Growth)

Forecasted Net Profit Margin

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026

11% 10% 9% 8% 7% 6% 5% 4% 3%

Source: Team Analysis

Net Profit Margin 5-Year Average Forecast Linear (Net Profit Margin)

In-depth Approach An in-depth approach provides a more accurate picture of future dividends. This was done by (1) forecasting revenues, and (2) identifying the forward-looking net profit margin (NPM), growth in shares outstanding and payout ratio, through FY22 to FY26.

Forecasting Revenues Understanding IDX’s business model and plans, it is anticipated that through FY22 to FY24 the firm’s revenue growth will slowly cool off, from 21% in FY21 to 18%, 16%, 14%, respectively. This period is expected to be supported by tailwinds from FY20 and FY19 vertical integrations with their subsequent created synergies, and backed by the firm’s organic growth through brow- and green-field expansions. Through FY25 and FY26 revenue growth is projected to settle as it converges with the 5-year average EPS growth. This is expected to be supported by the UK joint venture materialising returns along with acquisitions and/or continued organic growth; depending on the availability of quality acquisition opportunities.

Forecasted Shares Outstanding

Identifying Remaining Forward-Looking Metrics

20.0%

FY21 delivered an NPM of 8.9% and the 5-year average is 8.6%. FY19 was 9% and even despite the pandemic IDX held it has 8.3% through FY20. It is estimated that management will ensure similar performance in the future with a projected 9% NPM through FY22 to FY26.

15.0% 10.0% 5.0%

Source: Team Analysis

2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026

0.0%

Growth in Shares Outstanding Average Forecast

The number of shares outstanding is expected to grow in line with the long-term average of 4.7%, taking into account future equity raising that will be used for acquisitions and organic expansion projects.

IDX’s payout ratio is projected to be 80%, just above the 5-year average of 78% and just below the FY21 level of 81%.

Forecasted Payout Ratio

Running the model with these growth rates and assumptions produces an implied price of $3.60 (Appendix C3).

85% 80%

FREE CASH FLOW TO EQUITY (FCFE) VALUATION

75%

Corresponding with DDM, SGR and average growth rate are concluded to be poor proxies for FCFE growth.

70%

Payout Ratio

Average

2026

2025

2024

2023

2022

2021

2020

2019

2018

2017

65%

Forecast

Forecasted Depreciation& Amortisation

The previous 5-years have presented volatile FCFE growth rates, from none-computable negative FCFE to positive in FY17 to 1349% in FY19 due to strong revenue growth and changes in working capital. Consequently, there can only be a 4-year average, resulting in a 310% growth rate. The 4-year median of 18% is better,yet is still an overstated estimate. These are skewed and unrealistic representations of IDX’s future.

In-depth Approach

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026

10% 9% 8% 7% 6% 5% 4% D&A % of Revenues Forecast

Median

Forecasted CAPEX 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0%

An in-depth approach also provides a clearer picture of future FCFE. This was done by (1) utilising the existing forecasts from the in-depth DDM, (2) identifying the following forward-looking variable as percentages of revenues: depreciation and amortisation, capital expenditure (CAPEX), change in working capital, and net borrowing, this is forecasted through FY22 to FY26.

Identifying Remaining Forward-Looking Metrics Depreciation and amortisation have spiked throughout the pandemic as IDX, like many companies, took advantage of the instant asset write-off and accelerated depreciation deduction policies put in place by the Australian government. Moving forward, this metric is projected to converge with the long-term median of 5.6% of revenue.

CAPEX through FY22-26 is expected to align with the firm’s 5-year average of 7.2% of revenue.

This will include new equipment and clinic purchases, ensuring continued organic growth.

2014 2016 2018 2020 2022 2024 2026 CAPEX % of Revenues 5-Year Average Forecast

Forecasted Change in Working Capital 0.0% -1.0% -2.0% -3.0% -4.0% -5.0% -6.0% -7.0%

The change in working capital has been smoothed, using the long-term median of-1.4% of revenue to remove large swings. This metric has been negative for the group’s entire public lifetime, thus -1.4% is perceived a reasonable smoothed figure for the forecasted period.

The positive net borrowing projected will help sustain IDX’s CAPEX requirements for organic growth (along with equity raising and retained earnings). The long-term median of 2% removes the significant outliers and paints a clearer picture of IDX’s debt usage in relation to revenue.

Running the model with these assumptions produces an implied price of $5.38 (Appendix C4).

2014 2016 2018 2020 2022 2024 2026 Change in WC % of Revenues Median Forecast

Forecasted Net Borrowing 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% -6.0%

SENSITIVITY ANALYSIS

2014 2016 2018 2020 2022 2024 2026 Net Borrowing % of Revenues Median Forecast

RELATIVE VALUATION

CAPM 6.27% 6.77% 7.27% 7.77% 8.27%

$6.11 $6.43 $6.78 $7.19 $7.65

$5.48 $5.72 $6.00 $6.31 $6.66

$4.96 $5.16 $5.38 $5.62 $5.90

$4.53 $4.69 $4.87 $5.07 $5.29

$4.17 $4.30 $4.45 $4.61 $4.79

Price to Book Ratio Price to Book Ratio

5 4 3 2 1 0

This relative valuation assesses IDX in comparison to its peers, based on the following ratios, price to, book, earnings, and cash flow, as well as enterprise value to sales (as of 14/09/2021).

In terms of the price to book ratio, IDX’s results are above its competitors. This indicates that IDX’s stock may be overvalued as compared to its peers. IDX’s multiple was 4.4x, implying that the stock is currently priced at 4.4 times its book value, indicating an overvaluation.

Within price to earnings ratio, IDX’s is very close to the competitor average which indicates a fairly priced stock. In comparison to its competitors, Sonic and Healius are undervalued, whereas Capitol is excelling well above. Based on this ratio, IDX’s figure is aligned with its competitors and is fairly valued.

Price to cash flow for Integral is above its competitors which indicates overvaluation. IDX’s competitors are also very similar in their results in this ratio, however, Healius again achieved a very low result, appearing undervalued.

Finally, enterprise value to sales ratio for IDX was above the competitor average. This also suggests that IDX is overvalued.

Combined relative valuation was determined by adding each result from each ratio. Based on this result, Integral is higher than the industry but lower than one of its competitors. Overall, the relative valuation implies that IDX is, more or less, fairly valued. This is logical as it can be expected that IDX’s strong growth prospects would cause higher multiples.

Price to Cash Flow Ratio 15 10 5 0

Enterprise Value to Sales Ratio 3 2.5 2 1.5 1 0.5 0

Combined Relative Relative Valuation

35 30 25 20 15 10 5 0

Enterprise Value to Sales Ratio

Price to Earnings Ratio

Price to Earnings Ratio

Price to Cash Flow Ratio

Terminal Growth

FCFE Sensitivity Analysis

1.86% 2.11% 2.36% 2.61% 2.86%

The FCFE model’s robustness to changes in the discount rate (CAPM) and terminal growth has been analysed to assess their effect on the buy recommendation. Over 75% of the tested scenarios imply a materially positive expected return over the next six to twelve months. While an increase in the discount rate poses downside risk, and investors must be aware of increasing interest rates in the mid-term, these metrics are expected to have relative stability through the near term.

60 50 40 30 20 10 0

TECHNICAL ANALYSIS RELATIVE SHARE PRICE PERFORMANCE Index Comparison

IDX & Indexes Comparison Source: Refinitiv Eikon 2021 Comparing IDX’s share price trend to the S&P/200 ASX and S&P/200 Healthcare indexes over the past -years, a clear strong positive trend can be observed in all three and all falling sharply in March 2020 at the onset of the pandemic. Significantly, IDX’s stock fell -18.3 from the 26th of August to the 1st of September. IDX’s drop in share price was caused by their FY results announcement on the 2 th. While the announcement was positive, it was less than investors' expectations. The strong positive long-term trend indicates that the drop may be a potential opportunistic buy signal for investors when compared to the above indexes.

Peer Group Comparison

IDX & Peer Comparison Source: Refinitiv Eikon 2021 All peers had a sharp decline in March 2020 as the pandemic came to reality. Since then, all four peers have followed a similar recovery with strong growth. Excluding the pandemic sell-off, it is clear that IDX has risen the fastest, with far less volatility as compared to all peers, even Sonic Healthcare.

IDX is more predictable than the other peers and has had the highest returns over the 5-years. The recent sell off makes IDX appear as somewhat of a bargain as compared to its publicly traded peers.

MOVING AVERAGES AND VOLUME

Moving Average & Volume Analysis Source: Refinitiv Eikon 2021 While there is not a clear buy signal based on moving averages (MAs) and volume, the 50-day MA line does seem to be approaching the 200-day MA line, suggesting a medium strength buy signal and may likely become a strong buy signal in the coming weeks. As IDX’s stock recovers from the recent sell-off, the 50-day MA line may likely cross over the 200-day in the coming weeks. This would also likely be met with spikes in volume, as seen in 1Q FY20 when the 50-day MA closed above the 200-day. With this as a likely possibility, IDX appears to be either a strong buy from a moving average perspective. With the support and resistant lines, the 5-year trend for IDX is clear. While the pandemic caused a breach, IDX quickly recover and got back on the long-run trend. This kind of recovery is projected to occur again as the stock returns to the long-term trend.

PRICE EVALUATION AND DISCUSSION The intrinsic values produced based on the DDM and FCFE are $3.60 and $5.38, respectively.

Due to the dividend payment growth variability, the DDM is not as useful, nor accurate, as compared to the FCFE model which encompasses a broader base of information and is a more accurate representation of returns that will be available to equity holders (either through dividends or capital growth). Therefore we have chosen to exclude the DDM price calculation and only accept the implied fair value from the FCFE. The difference of the FCFE to the recent share price is likely associated with an over-exaggeration of IDX’s less than expected end of FY21 financial results and the ensuing selloff that occurred thereafter. The preceding analysis supports the view that investors have underestimated the future free cash flows of IDX, causing temporary mispricing of the stock.

The DDM significantly underprices the ordinary shares of IDX, as the model neglects the additional growth that investors should expect from IDX’s roughly 20% retention and reinvestment of earnings.

Through the technical analysis conducted, IDX’s ordinary share also appears well supported for strong continued growth in the near term. This is evident in IDX’s strong long-term growth which is in line with relevant indexes and surpassing their peers. Medium buy signals are supported based on moving averages with the potential for strong buy signals on volume in the coming weeks.

The overall consensus based on the proceeding qualitative analysis is that IDX is a highly profitable, competitive, strategic, and well-managed company, with strong positive outlook and growth plans over the next 5-years. The intrinsic price target based on the FCFE model, and all other financial analyses conducted are in agreement with the qualitative factors assessed.

Based on the validated FCFE model, the implied intrinsic value of IDX’s ordinary shares is $ .3 , representing a 1 closing price of $4.71 (14/09/21), establishing the investment recommendation as a buy.

undervaluation based on the

CONCLUSION AND RESTATEMENT OF RECOMMENDATION The report set out to assess IDX’s current position and prospects, as well as incorporate various valuation techniques to arrive at estimates of the intrinsic value of the company's stock to, ultimately, provide a buy, sell or hold recommendation.

The report utilised company, industry and peer group, DuPont ROE, macro and microeconomic, and technical, analysis methods, along with, DDM, FCFE and, relative valuation methods, to evaluate IDX, and sensitivity analysis to test the robustness of the implied intrinsic valuation. From both qualitative and quantitative perspectives, based on all the preceding analyses conducted, IDX was found to be a highly profitable, competitive, strategic and, well-managed company, with strong positive outlook and growth plans over the next 5-years.

Based on the validated FCFE model, the implied intrinsic value of IDX’s stock was found to be $ .3 , presenting a 1 undervaluation based on the closing price of $4.71 (14/09/21), establishing a buy recommendation, representing an expectation of a materially positive return over the next six to twelve months.

LIST OF REFERENCES Reilly, Frank K., Keith C. Brown and Sanford Leeds, Investment Analysis and Portfolio Management (11th Edition), Thomson South-Western, 2019.

Integral Diagnostics 2021, Integral Diagnostics, Integral Diagnostics, viewed 28 September 2021, <https://www.integraldiagnostics.com.au/>.

Integral Diagnostics 2021, Annual Report 2021, Managing Director and Chief Executive Officer’s Report, People and technology, Integral Diagnostics, viewed 28 September 2021, <https://www.integraldiagnostics.com.au/reports/>.

Integral Diagnostics 2021, Environment, Social and Governance (ESG) Report 2021, Integral Diagnostics, viewed 28 September 2021, <https://www.integraldiagnostics.com.au/reports/>.

Integral Diagnostics 2021, Annual Report 2021, Managing Director and Chief Executive Officer’s Report, Growth and acquisitions, Integral Diagnostics, viewed 01 September 2021, <https://www.integraldiagnostics.com.au/reports/>.

Integral Diagnostics 2021, Annual Report 2021, Chair’s Report, Quality Growth, Integral Diagnostics, viewed 10 September 2021, <https://www.integraldiagnostics.com.au/reports/>.

Refintiv Eikon 2021, INTEGRAL DIAGNOSTICS LTD, market report, Refinitiv Eikon, viewed 28 September 2021, <https://apac1.apps.cp.thomsonreuters.com/web/Apps/Corp?s=IDX.AX&st=RIC&app=true>.

Refinitiv Eikon 2021, I-MED RADIOLOGY NETWORK LTD, market report, Refinitiv Eikon, viewed 28 September 2021, <https://apac1.apps.cp.thomsonreuters.com/web/Apps/Corp?s=4298145294&st=OAPermID&app=true>.

Refinitiv Eikon 2021, HEALIUS LTD, market report, Refinitiv Eikon, viewed 28 September 2021, <https://apac1.apps.cp.thomsonreuters.com/web/Apps/Corp?s=HLS.AX&st=RIC&app=true>.

Refinitiv Eikon 2021, CAPITOL HEALTH LTD, market report, Refinitiv Eikon, viewed 28 September 2021, <https://apac1.apps.cp.thomsonreuters.com/web/Apps/Corp?s=CAJ.AX&st=RIC&app=true>.

Refinitiv Eikon 2021, SONIC HEALTHCARE LTD, market report, Refinitiv Eikon, viewed 28 September 2021, <https://apac1.apps.cp.thomsonreuters.com/web/Apps/Corp?s=SHL.AX&st=RIC&app=true/>.

Johnson, S 2021, Diagnostic Imaging Services in Australia, industry report Q8522, IBIS World, viewed 28 September 2021, <https://my-ibisworldcom.ezproxy.lib.rmit.edu.au/au/en/industry/q8522/about>.

Australian Bureau of Statistics 2021, Economic activity increased 0.7% in June quarter, Australian Bureau of Statistics, viewed 1st of October 2021, <https://www.abs.gov.au/media-centre/media-releases/economic-activity-increased-07-june-quarter>.

Australian Bureau of Statistics 2021, Labour Force, Australia, Australian Bureau of Statistics 2021, viewed 1st of September 2021, <https://www.abs.gov.au/statistics/labour/employment-and-unemployment/labour-force-australia/latest-release>.

Simply Wall Street 2021, Simply Wall Street 2021, Integral Diagnostics Limited (ASX:IDX) Stock Has Shown Weakness Lately But Financials Look Strong: Should Prospective Shareholders Make The Leap, Simply Wall Street 2021, Viewed 1st of October 2021, <https://simplywall.st/stocks/au/healthcare/asx-idx/integral-diagnostics-shares/news/integral-diagnostics-limited-asxidx-stock-has-shownweakness>.

Integral Diagnostics 2020, 1H21 results, Integral Diagnostics 2020, Viewed 1st of October 2021, <https://www.integraldiagnostics.com.au/wpcontent/uploads/2021/03/210305-HY21-Investor-Presentation-Correction.pdf>.

Integral Diagnostics 2021, Integral Diagnostics 2021 Annual Report, Integral Diagnostics 2021, Viewed 1st of October 2021, <file:///C:/Users/samsr/Downloads/Integral-Diagnostics-AR-2021_FA_Online.pdf>.

Yahoo Finance 2021, Integral Diagnostics Limited (IDX.AX), Historical Date, Yahoo Finance, view 14 September 2021, <https://au.finance.yahoo.com/quote/IDX.AX/history?period1=1475020800&period2=1632787200&interval=1d&filter=history&frequency=1d&inc ludeAdjustedClose=true>.

Investing.com 2021, S&P/ASX 200 (AXJO), Historical Data, Investing.com, viewed, 14 September 2021, <https://au.investing.com/indices/aus-200historical-data>.

Refinitiv Eikon 2020, Integral Diagnostics Limited, Financials, Income Statement, Labour & Related Costs, viewed 15 September 2021, <https://apac1.apps.cp.thomsonreuters.com/web/Apps/Corp?s=IDX.AX&st=RIC&app=true>.

ABS 2020, Twenty Years Population Change, Australian Bureau of Statistics, viewed 01 September 2021, <https://www.abs.gov.au/articles/twentyyears-population-change>.

ABS 2021, Healthcare and Social Assistance our largest industry, ABS 2021, viewed 27 September 2021 https://www.abs.gov.au/ausstats/abs@.nsf/mediareleasesbyReleaseDate/B611DFF5E8590F8ACA2581BF001F743B IDX 2021 managing director… Diagnostic Imaging Industry Developments Integral Diagnostics 2021, Annual Report 2021, Managing Director and Chief Executive Officer’s Report, Diagnostic Imaging Industry Developments, Integral Diagnostics, viewed 10 September 2021, <https://www.integraldiagnostics.com.au/reports/>.

Integral Diagnostics 2021, Annual Report 2021, Managing Director and Chief Executive Officer’s Report, FY22 Priorities, Integral Diagnostics, viewed 10 September 2021, <https://www.integraldiagnostics.com.au/reports/>.

The World Bank 2020, GDP Growth (Annual %) – Australia, The World Bank, viewed 22 October 2021, <https://data.worldbank.org/indicator/NY.GDP.MKTP.KD.ZG?locations=AU>.

LIST OF APPENDICES APPENDIX A INDUSTRY AND PEER GROUP ANALYSIS ............................................................................... 18 APPENDIX B DUPONT ROE CALCULATIONS .............................................................................................. 19 APPENDIX C1 CAPM CALCULATIONS ........................................................................................................ 20 APPENDIX C2 TERMINAL GROWTH .......................................................................................................... 21 APPENDIX C3 DIVIDEND DISCOUNT MODEL ............................................................................................. 22 APPENDIX C4 FREE CASH FLOW TO EQUITY MODEL ................................................................................. 22 APPENDIX C5 SENSITIVITY ANALYSIS ....................................................................................................... 23 APPENDIX C6 RELATIVE VALUATION ........................................................................................................ 23

APPENDIX A INDUSTRY AND PEER GROUP ANALYSIS All tables below were used to create the graphs found within the Industry and Peer Group Analysis section. All data has been sourced from Refinitiv Eikon.

Gross Profit Margin 2017 2018 2019 2020 2021

Integral Diagnostics 95.1% 95.4% 95.5% 95.5% 95.2%

Healius 89.4% 88.3% 87.5% 87.3% 85.8%

Capitol Health 89.0% 92.8% 91.8% 91.9% 92.7%

Sonic Healthcare 83.9% 83.4% 83.8% 83.6% 81.5%

Pretax ROA 2017 2018 2019 2020 2021

Integral Diagnostics 11.5% 11.5% 12.0% 7.8% 7.3%

Healius -15.2% 0.9% 2.5% 1.6% 4.0%

Capitol Health 1.2% -5.5% 18.1% 1.0% 7.2%

Sonic Healthcare 7.6% 7.7% 8.0% 6.3% 15.3%

Current Ratio 2017 2018 2019 2020 2021

Integral Diagnostics 1.09 0.84 0.89 1.00 1.06

Healius 0.80 0.77 0.88 1.36 0.48

Capitol Health 4.55 0.73 0.51 0.51 0.75

Sonic Healthcare 0.81 1.42 0.95 1.19 1.03

Debt/Equity Ratio 2017 2018 2019 2020 2021

Integral Diagnostics 0.74 0.70 1.09 1.22 1.21

Healius 0.47 0.47 0.39 0.91 0.71

Capitol Health 0.50 0.04 0.41 0.55 0.65

Sonic Healthcare 0.75 0.67 0.56 0.83 0.51

Inventory Turnover 2017 2018 2019 2020 2021

Integral Diagnostics 24.40 23.40 28.30 17.90 17.80

Healius Sonic Healthcare 7.00 8.90 8.50 9.00 8.70 8.80 8.00 7.90 8.60 8.30

APPENDIX B DUPONT ROE CALCULATIONS Integral Diagnostics Dupont Analysis Net Profit Sales Revenue Total Sales Revenue Total assets Average Total Assets (2017 onwards) Total Debt Total Equity Net Profit Margin Asset Turnover Financial Leverage ROE

2016 $11,400,000.00 $168,000,000.00 $168,000,000.00 $181,100,000.00 $159,100,000.00 $89,200,000.00 $91,900,000.00 0.0679 1.06 0.97 6.95%

2017 $15,500,000.00 $180,100,000.00 $180,100,000.00 $190,400,000.00 $185,750,000.00 $92,000,000.00 $98,400,000.00 0.0861 0.97 0.93 7.80%

Healius Inc Dupont Analysis Net Profit Sales Revenue Total Sales Revenue Total assets Average Total Assets (2017 onwards) Total Debt Total Equity Net Profit Margin Asset Turnover Financial Leverage Return on Equity

2016 $74,900,000.00 $1,641,900,000.00 $2,832,700,000.00 $3,624,600,000.00 $7,454,470,000.00 $1,198,500,000.00 $2,426,100,000.00 0.05 0.38 0.49 0.86%

2017 -$516,800,000.00 $1,658,600,000.00 $3,058,800,000.00 $3,114,000,000.00 $3,369,300,000.00 $1,246,500,000.00 $1,867,500,000.00 -0.31 0.91 0.67 -18.88%

Capitol Health Dupont Analysis Net Profit Sales Revenue Total Sales Revenue Total assets Average Total Assets (2017 onwards) Total Debt Total Equity Net Profit Margin Asset Turnover Financial Leverage Return on Equity

2016 $38,400,000.00 $104,500,000.00 $104,500,000.00 $212,400,000.00 $202,600,000.00 $84,600,000.00 $127,800,000.00 0.3675 0.44 0.66 10.70%

Sonic Healthcare Dupont Analysis Net Profit Sales Revenue Total Sales Revenue Total assets Average Total Assets (2017 onwards) Total Debt Total Equity Net Profit Margin Asset Turnover (2017 onwards) Financial Leverage Return on Equity

2016 $451,400,000.00 $5,017,700,000.00 $5,017,700,000.00 $7,371,000,000.00 $7,454,470,000.00 $3,708,000,000.00 $3,663,000,000.00 0.0900 0.73 1.01 6.65%

2018 $15,100,000.00 $189,700,000.00 $189,700,000.00 $195,500,000.00 $192,950,000.00 $102,100,000.00 $93,400,000.00 0.0796 0.983 1.09 8.55%

2019 $21,000,000.00 $232,400,000.00 $232,400,000.00 $314,700,000.00 $255,100,000.00 $187,400,000.00 $127,300,000.00 0.0904 0.911 1.47 12.12%

2020 $23,000,000.00 $275,600,000.00 $275,600,000.00 $586,900,000.00 $450,800,000.00 $358,600,000.00 $228,300,000.00 0.0835 0.611 1.57 8.01%

2021 $31,300,000.00 $350,700,000.00 $350,700,000.00 $654,900,000.00 $620,900,000.00 $358,600,000.00 $296,300,000.00 0.0893 0.565 1.21 6.10%

2018 $4,100,000.00 $1,704,600,000.00 $3,217,900,000.00 $3,126,300,000.00 $3,120,150,000.00 $1,307,400,000.00 $1,818,900,000.00 0.00 1.031 0.72 0.18%

2019 $55,300,000.00 $1,562,100,000.00 $3,367,300,000.00 $3,352,600,000.00 $3,239,450,000.00 $1,301,500,000.00 $2,051,100,000.00 0.04 1.039 0.63 2.33%

2020 -$70,500,000.00 $1,557,000,000.00 $3,776,400,000.00 $4,588,300,000.00 $3,970,450,000.00 $2,657,000,000.00 $1,931,300,000.00 -0.05 0.951 1.38 -5.92%

2021 $43,700,000.00 $1,900,700,000.00 $3,776,400,000.00 $3,782,200,000.00 $4,185,250,000.00 $1,924,900,000.00 $1,857,300,000.00 0.02 0.902 1.04 2.15%

2017 -$4,100,000.00 $107,500,000.00 $107,500,000.00 $204,300,000.00 $208,350,000.00 $119,000,000.00 $85,300,000.00 -0.0381 0.5160 1.40 -2.75%

2018 -$10,900,000.00 $119,500,000.00 $119,500,000.00 $128,900,000.00 $166,600,000.00 $101,900,000.00 $27,000,000.00 -0.0912 0.717 3.77 -24.69%

2019 $24,300,000.00 $149,200,000.00 $149,200,000.00 $182,800,000.00 $155,850,000.00 $111,200,000.00 $71,600,000.00 0.1629 0.957 1.55 24.22%

2020 $900,000.00 $153,800,000.00 $153,800,000.00 $262,300,000.00 $222,550,000.00 $143,800,000.00 $118,500,000.00 0.0059 0.691 1.21 0.49%

2021 $11,900,000.00 $178,000,000.00 $178,000,000.00 $279,800,000.00 $271,050,000.00 $145,700,000.00 $134,100,000.00 0.0669 0.657 1.09 4.77%

2017 $427,800,000.00 $5,122,100,000.00 $5,122,100,000.00 $7,878,000,000.00 $7,624,500,000.00 $4,049,000,000.00 $3,829,000,000.00 0.0835 0.67 1.06 5.93%

2018 $455,500,000.00 $5,541,400,000.00 $5,541,400,000.00 $8,201,000,000.00 $8,039,500,000.00 $4,024,000,000.00 $4,177,000,000.00 0.0822 0.689 0.96 5.46%

2019 $549,700,000.00 $6,133,700,000.00 $6,133,700,000.00 $9,960,000,000.00 $9,080,500,000.00 $4,548,000,000.00 $5,412,000,000.00 0.0896 0.675 0.84 5.09%

2020 $527,700,000.00 $6,831,800,000.00 $6,831,800,000.00 $12,127,000,000.00 $11,043,500,000.00 $6,553,000,000.00 $5,574,000,000.00 0.0772 0.619 1.18 5.62%

2021 $1,315,000,000.00 $8,754,100,000.00 $8,754,100,000.00 $11,761,000,000.00 $11,944,000,000.00 $5,376,000,000.00 $6,385,000,000.00 0.1502 0.733 0.84 9.27%

Regarding Net Profit, Sales Revenue, Total Asset, Total equity and Total debt, this data was obtained from Integral Diagnostics Income statement and Balance sheets from the website Refinitiv Eikon.

To calculate Net Profit Margin, the Gross Profit was divided by the Sales Revenue for each year Regarding the Average Total Assets, the method was to sum the total assets from the current and previous year and divide it by 2 for each year To calculate the Asset Turnover, the Total Sales Revenue is divided by the Average total Assets for each year For Financial Leverage, the formula to calculate this is to divide the companies total debt by its total equity for each year.

To calculate Return on Equity, the formula is the product of the indicators Net Profit Margin, Financial Leverage and Asset Turnover These formulas were used for each company to calculate the required indicators.

As a result, for each indicator I.e Net Profit Margin, all the data was combined into one table for each company and each indicator. In addition to this, for each indicator, a graph was created to compare the Integral Diagnostics Performance against other companies.

APPENDIX C1 CAPM CALCULATIONS The CAPM equation is,

From here the ‘data analysis’ and ‘regression’ tools needs be used,

𝐸 𝑅 = rf + β ∗ E R mkt − rf Note:

E(R) – Expected Return rf Risk-free Rate E(R)mkt Expected Return on the Market Portfolio

(E(R)mkt rf) - Market Risk Premium (MRP) 𝛃 – Company Beta

The first step is to calculate beta.

The required data was received (holding period yields for the market portfolio and the stock, this was 5-years of data),

Daily Closing Prices Date 01-Jul-2016 04-Jul-2016 05-Jul-2016 06-Jul-2016 07-Jul-2016 08-Jul-2016 11-Jul-2016 12-Jul-2016 13-Jul-2016 14-Jul-2016 15-Jul-2016 18-Jul-2016 19-Jul-2016 20-Jul-2016

ASX200 5,246.6 5,281.8 5,228.0 5,197.5 5,227.9 5,230.5 5,337.1 5,353.2 5,388.5 5,411.6 5,429.6 5,458.5 5,451.3 5,488.7

IDX.AX $1.42 $1.46 $1.43 $1.47 $1.47 $1.46 $1.45 $1.50 $1.52 $1.52 $1.60 $1.62 $1.57 $1.57

HPY

HPY

ASX200

IDX.AX

This produces a summary table (note the light blue highlight is the raw beta), SUMMARY OUTPUT

0.006709 -0.01019 -0.00583 0.005849 0.000497 0.02038 0.003017 0.006594 0.004287 0.003326 0.005323 -0.00132 0.006861

0.031142 -0.02013 0.027397 0 -0.00667 -0.00671 0.033784 0.009804 0.003236 0.051613 0.01227 -0.0303 0

Regression Statistics Multiple R 0.290104047 R Square 0.084160358 Adjusted R Square 0.083435228 Standard Error 0.02348703 Observations 1265

Regression Statistics

ANOVA df Regression Residual Total

Intercept X Variable 1

SS 0.064024719 0.696722031 0.76074675

MS 0.064024719 0.000551641

F Significance F 116.062384 5.94175E-26

Coefficients Standard Error 0.001107611 0.000660672 0.686674766 0.063739015

t Stat 1.676492968 10.77322533

P-value 0.093889148 5.94175E-26

1 1263 1264

Lower 95% -0.000188523 0.56162876

Upper 95% 0.002403746 0.811720772

Lower 95.0% Upper 95.0% -0.000188523 0.002403746 0.56162876 0.811720772

Once the raw beta is produced the below formula is used to calculate the adjusted beta,

APPENDIX C1 CAPM CALCULATIONS (CONTINUED) The remain variable were provided,

An Estimate of the company's Beta 0.79 (Source: Team Analysis) The Risk-Free Rate of Return 1.13% 10yr Aus Gov Current Bid Yield (18/08/2021) (Source: Eikon) The Market Return 8.90% (Source: Canstar)

For here it is simply a matter of running the model,

Capital Asset Pricing Model (CAPM) CAPM: (E(R)) = rf + β * (E(R)mkt - rf) E(R) - Expected Return rf - Risk-free rate E(R)mkt - Expected Return on the market portfolio (E(R)mkt - rf) - Market Risk Premium (MRP) rf = 1.13% β= 0.79 E(R)mkt = 8.90% CAPM: E(R) = 7.27% Note: MRP =

7.77%

APPENDIX C2 TERMINAL GROWTH Terminal growth for both the DDM and FCFE model was calculated as the 10-year average of GDP growth as at 2020, the latest annual data from the World Bank.

Period 2020 GDP Growth -0.28% Source: Eikon - World Bank WDI Terminal Growth Rate 10yr Average GDP Growth 2.36%

2019 2.16%

2018 2.95%

2017 2.30%

2016 2.77%

2015 2.19%

2014 2.53%

2013 2.58%

APPENDIX C3 DIVIDEND DISCOUNT MODEL

APPENDIX C4 FREE CASH FLOW TO EQUITY MODEL

APPENDIX C5 SENSITIVITY ANALYSIS

Terminal Growth

A sensitivity analysis was run for the FCFE model as it was chosen to represent IDX’s intrinsic value. The sensitivity analysis was computed by running simulations of each of the various combinations of terminal growth and CAPM (the discount rate).

CAPM 6.27% 6.77% 7.27% 7.77% 8.27% 1.86% 2.11% 2.36% 2.61% 2.86%

$6.11 $6.43 $6.78 $7.19 $7.65

$5.48 $5.72 $6.00 $6.31 $6.66

$4.96 $5.16 $5.38 $5.62 $5.90

$4.53 $4.69 $4.87 $5.07 $5.29

$4.17 $4.30 $4.45 $4.61 $4.79

APPENDIX C6 RELATIVE VALUATION All tables below were used to create the graphs found within the Relative Valuation section. All data has been sourced from Refinitiv Eikon.

Price to Book Ratio

Integral Diagnostics 4.3

Healius 1.5

Capitol Health 3.8

Sonic Healthcare 2.8

Competitor average 3.1

Price to Earnings Ratio

Integral Diagnostics 24.2

Healius 15

Capitol Health 34.1

Sonic Healthcare 19.9

Competitor average 23.3

Price to Cash Flow Ratio

Integral Diagnostics 13.1

Healius 6.7

Capitol Health 12.8

Sonice Healthcare 12.5

Competitor average 11.3

Enterprise Value to Sales Ratio

Integral Diagnostics 2.9

Healius 1.6

Capitol Health 2.4

Sonic Healthcare 2.5

Competitor average 2.4