Healius: Strategy day - the evolution continues
About the author:
- Author name:
- By Dr Derek Jellinek
- Job title:
- Senior Analyst
- Date posted:
- 24 May 2022, 9:30 AM
- Sectors Covered:
- Nothing too earth shattering was revealed at the inaugural strategy day, with Healius' (ASX:HLS) continued evolution to become a scaled, digitally-enabled diagnostic operator.
- The focus centered around unlocking AI to deliver superior clinical insights, operational efficiencies in Pathology and Diagnostic Imaging, and building strategic capabilities in adjacent growth areas with Agliex in the clinical trials space.
- A concurrent trading update showed revenue slowly improving but opex remains elevated, while SIP phase two is on track, with >100 initiatives slated to deliver 300bp operating margin improvement exiting FY23.
- While many moving parts carries execution risk, we view underlying fundamentals as strong and valuation attractive, with the company positioned to benefit from a backlog in routine care and base load of COVID testing.
- We adjust our FY22-24 forecasts, with our DCF/SOTP target price declining to (login to view). Add rating maintained.
Strategy day saw management focus on capturing growth via three key areas: a) digital enhancements (ie modernising systems and processes); b) growing Pathology and Diagnostic Imaging (DI; ie commercial/operational agendas and progress on cost outs and improving efficiencies under the Sustainable Improvement Program-SIP); and c) growth opportunities (ie recent acquisition of Agilex and the global clinical trials market).
A concurrent trading update was light on financials, merely stating that revenue is slowly improving across all divisions and ahead of Medicare data, albeit not yet at normalised levels, and costs remaining elevated due to the “unpredictability of Omicron” (ie COVID infections; staffing levels; and surgical cancellations).
While normalised trading levels have yet to emerge, management remains confident demand will revert to long-term trends, but timing remains the biggest unknown, and also flagged inorganic growth opportunities (ie collection centres).
COVID PCR testing c15-18k per working day from Feb-Apr is in line with expectations, and believed “to be here to stay”, while influenza testing has “surged” in the last four weeks and is expected to remain elevated through the winter.
- Digital enhancements: holistic modernisation of central Pathology lab information system, department-by-department over the next two years; entails digitising/automating manual or paper-based workflows and diagnostics support for prevention/treatment of disease;
- Growing Pathology and DI: optimising mix, product, price and distribution; efficient and standardised workflows and workforce; expand footprint and grow higher-margin specialist contribution;
SIP remains on track to deliver A$67m of EBIT uplift (+300bp margin) exiting FY23, with c80% already delivered/achievable in the near term, underpinned by more than 100 initiatives (25% complete; 75% in train), and with an additional A$20-33m in Pathology and A$5-8m in DI;
- Growth opportunities: bioanalytical laboratory Agilex Biolabs, looks like a strategic adjacency, offering a high operating margin (c40%), capital-light (A$2m) growth profile (rev +15%), with management looking to extend the product offering and footprint offshore via acquisitions/partnerships.
Forecast and valuation update
We have adjusted FY22-24 forecasts mainly on COVID testing assumptions and D&A estimates, with underlying profit +14%/-19%/-13%, respectively.
Our (login to view) price target is based on a blended DCF, PE and SOTP analysis.
We believe HLS is attractively valued and well placed, benefiting from the inevitable rebound in demand from a backlog in diagnosis and surgery, as well as the likely continuance of COVID PCR testing (at some level).
- Lower-than-expected COVID testing;
- More limited divisional growth;
- Margin compression;
- Lower-than-forecast gains from Agilex;
- Less government funding.
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