As the UK’s leading occupational health provider, Optima Health (OPT:AIM) is uniquely positioned to consolidate a fragmented market via bolt-on acquisitions as well as delivering organic growth faster than the underlying market.
Analysts at RBC Capital Markets believe Optima Health’s buy-and-build strategy can deliver a 23% compound annual growth rate in total revenue over the next five years alongside an expansion in margins driven by scale efficiencies.
The company was recently spun-out of business-critical services provider Marlowe (MRL:AIM) and is due to reveal its maiden half year results to investors in early December.
Newly-listed companies can be higher-risk and cautious investors may prefer to wait and see how the management team performs in the full gaze of a public listing before buying.
That said, we like Optima’s clear growth opportunity, its market-leading position and the experienced management team led by chief executive Jonathan Thomas who has been with the business since 2013.
As the prior finance chief, Thomas oversaw growth in revenue from £28 million to more than £100 million and was involved in the trade sale to Marlowe in 2022. He was also instrumental in integrating the Marlowe-acquired businesses.
A MARKET RIPE FOR CONSOLIDATION
Optima Health is the market leader and around twice the size of its nearest competitor in terms of revenue and customers, serving over 2,000 clients in both the public and private sector and covering more than five million people in the UK workforce.
The company operates across the whole size spectrum, from small businesses through to some of the largest employers in the UK including the Metropolitan Police, retailers Sainsbury’s (SBRY) and Currys (CURY), Bupa and the Ministry of Defence.
The Health and Safety at Work Act of 1974 governs the primary legislation in the UK covering occupation health. The market was worth around £1.3 billion in 2023 and grows around 4% a year.
Around 60% of the market is outsourced, with another 25% of companies providing an in-house service while the rest of the market is serviced by the NHS (National Health Service) or other government services.
There is an ongoing shift towards outsourcing driven by rising sickness rates, an ageing population and increased regulation. To give some idea of the degree of market fragmentation, there are more than 5,000 companies providing occupational health services in the UK but only 125 of these have a turnover of more than £500,000.
Another potential area of growth for Optima is the estimated 80% of employers in the UK who do not offer occupational health services, either because they are unaware of the regulations or are not yet compliant.
RBC believes Optima can drive its total market share from 10% currently to 25% by 2030 which would imply revenue growing more than three-fold to around £375 million.
Optima has four operational centres and 48 clinical sites offering services such as health surveillance, performance management, immunisation, safety-critical activity and wellbeing services. It also operates around 30 mobile clinics and remote delivery services.
The company’s 800 professional clinicians make over one million client interventions each year with 60% being conducted remotely, and Optima is aiming to increase the rate of remote interventions to drive efficiency.
HIGH REVENUE VISIBILITY AND RETENTION
The company has a predictable revenue stream stemming from its approach to developing long-term contracts, typically between three and five years. Contracts with smaller companies are generally shorter in duration with annual reviews, but tend to be higher-margin than public sector contracts.
Optima achieves high revenue retention rates, averaging 95% over the last three years. One of the reasons for this is the excellent return on investment Optima delivers.
Chief executive Jonathan Thomas told Shares the company can demonstrate a strong return on investment of around seven to one.
Optima has invested over £15 million in its IT platform over the last seven years as it aims to increasingly automate the business, and has also developed a proprietary digital tool enabling patients to self-assess using a computer or smartphone.
The product is undergoing an accreditation assessment which could lead to a successful rollout into the NHS, and is expected to be delivered on a SaaS (software-as-a-service) basis.
Overall, we believe Optima Health has the potential become a bigger, more profitable business over several years and provide strong shareholder returns.
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
Shares is provided for your general information and use and is not a personal recommendation to invest. It is not intended to be relied upon by you in making or not making any investment decisions. The investments referred to in these articles will not be suitable for all investors. If in doubt please seek appropriate independent financial advice.
Investors acting on the information in these articles do so at their own risk and AJ Bell Media and its staff do not accept liability for losses suffered by investors as a result of their investment decisions.
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