Healius: 1H beat – right price and well placed for a rebound

About the author:

Author name:

By Dr Derek Jellinek

Job title:

Senior Analyst

Date posted:

24 February 2022, 1:30 PM

Sectors Covered:

Healthcare

• 1H underlying results were above expectations, with solid revenue growth underpinned by COVID-related gains and cost outs, driving margins and OCF to record levels.
• Pathology posted triple-digit profit growth, on uplift in both COVID and non-COVID testing, while Imaging and Day Hospitals went backwards on COVID-impacted elective surgery restrictions and increased costs.
• While no FY21 guidance was provided, as COVID uncertainty remains, we believe the company looks well placed to not only benefit from a likely “baseload” of COVID PCR testing going forward, but also from any rebound in demand from the backlog in diagnosis and surgery as the country opens up.
• We adjust our FY22-23 forecasts, with our DCF/SOTP target price declining to (login to view). Add.

Event

1H underlying results were above expectations, with EBIT A$376m (+176%; Consensus A$309m) or revenue up 44% to A$1,339m (Consensus A$1,190m). 

Operating margins grew 13.6pp to 28.1%, supported by strong revenue growth and costs outs.

GOCF was strong (A$408m; +43%), with EBITDA conversion >90%, supporting a dividend of A$0.10 (+54%; payout ratio 24%).

FCF increased 37% to A$319.5m, with controlled capex (A$91m, +166%, but A$42.4m, +33% organic) and B/S flexibility (ND/EBITDA 0.4x; interest cover 49x).

Analysis

Pathology posted solid gains (EBIT +196%, A$376m) on strong COVID volumes (PCR tests averaging >40k/working day), with non-COVID revenue up 3% and cost-outs supporting margins (+16pp, 33.8%).

Day Hospitals and Imaging were soft, negatively impacted by COVID-related elective surgery restrictions and higher costs, with revenue growth flat (A$25m; A$200m) and EBIT falling 41.2% and 16.2%, respectively (A$3m; A$11.9m).

Management remains “comfortable” with Sustainable Improvement Program (SIP) progress, with c50% of initiatives moving from pilot to rollout phase, and is “pretty confident” in targets (ie 300bp EBIT margin uplift in Pathology/Imaging FY20-23).

Revenue growth from the recently closed Agilex Biolabs acquisition is now expected >15%, with also opportunities for synergistic savings.

Management expects a “baseload” of COVID PCR testing to persist “for some time to come” and is focused on improving testing throughput, flagging clinical issues around the disease remain of concern and continued waves of outbreaks are likely. 

While no FY22 guidance was provided, continued (albeit slowing) PCR testing, coupled with an acceleration in demand for routine healthcare services as the country opens up, including a period of catch-up for the backlog in diagnosis and surgery, lays the groundwork for solid growth from pre-COVID levels. 

Forecast and valuation update

We have adjusted FY22-24 forecasts mainly on decreased COVID testing assumptions, shaving up to 4.9% from underlying profit. 

Our (login to view) price target is based on a blended DCF, PE and SOTP analysis.

Investment view

We continue to believe HLS is attractively valued and well placed, benefiting from the likely continuance of COVID PCR testing (at some level) and from the inevitable rebound in demand from a backlog in diagnosis and surgery.

Price catalysts 

Investor day Apr-22.

Risks

Lower-than-expected COVID testing; more limited divisional growth; margin compression; lower gains from Agilex than forecast; less government funding.

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