Healius: Pieces coming together - “a platform for growth”

About the author:

Author name:

By Dr Derek Jellinek

Job title:

Senior Analyst

Date posted:

31 August 2022, 8:30 AM

Sectors Covered:

Healthcare

• Healius' (ASX:HLS) FY22 underlying results were broadly in line with expectations, with double-digit revenue growth and ongoing cost outs driving leverage and robust cash flow.
• Not surprising, COVID testing underpinned the result, while Imaging and Day Hospitals went backwards on COVID-impacted elective surgery restrictions, lockdowns and increased costs.
• While COVID uncertainty continues to limit quantitative guidance, we believe well managed costs, ongoing efficiencies and growth initiatives, and strong B/S, not to mention some continued level of COVID testing and an eventual rebound in demand from the backlog in diagnosis and surgery, lays the groundwork for solid growth.
• We adjust our FY23-24 forecasts and roll forward valuation multiples, with our DCF/SOTP target price increasing to (login to view). Add maintained.

Event

FY22 underlying results were broadly in line, with NPAT A$309m (+108%; consensus A$306m) on revenue up 22% to A$2,338m (consensus A$2,363m), underpinned by strong increases in Pathology. 

Operating income grew c85% to A$492m, with margins up 720bp to 21.1% (but - 16.5pt hoh), supported by the ongoing Sustainable Improvement Program (SIP) and well managed labour costs (% of revs: 40.7% vs 44.4%).

GOCF was strong (A$428m; +119%), with good EBITDA conversion >90%, supporting a final dividend (A$0.06, -12%; payout ratio 32%), and B/S flexible (ND/EBITDA 0.8x; interest cover 44x).

No FY23 guidance, “due to unpredictability of COVID-19 and timing of acceleration in underlying diagnostics”.

Analysis

Pathology saw solid gains (EBIT +97%, A$498m) on strong COVID volumes (>13m tests to date), with non-COVID earnings down “marginally”, but more efficient (revenue/centre +11% on FY19) on growth in commercial and stable market share in bulk-billed services, and cost-outs supporting margins (+900bp, 26.4%).

Day Hospitals and Imaging were soft, negatively impacted by COVID-related elective surgery restrictions, lockdowns and higher costs, with revenue growth down 2-3% (A$49m; A$394m) and EBIT declining 38-41% (-A$41m; -A$38m).

COVID testing averaged 10-12k/working day in Jul-Aug, with management flagging a range of 7-14k/working day (10-20% off peak levels) into the “foreseeable future” as a long-term addition to regular testing.

While non-COVID testing progressively improved in Jul-Aug, commensurate with the waning Omicron wave, the business tends to move inversely to COVID, so with positivity rates currently at c12-15%, trading is likely to remain volatile, despite a growing backlog and catch-up in routine services. 

SIP remains on track, with A$30m (45% of annualised incremental EBIT phase II initiatives) delivered and targeting 300bp margin expansion exiting FY23.

Forecast and valuation update

We have adjusted FY23/24 forecasts on COVID testing and base business assumptions, with underlying profit -8%/+0.5%, respectively.

We roll forward valuation multiples, with our DCF/SOTP based price target increasing to (login to view).

Investment view

We believe HLS remains attractively valued and well placed, benefiting from continuance of COVID-19 PCR testing (at some level), ongoing efficiencies and cost outs, coupled with the inevitable rebound in demand in diagnosis and surgery.

Price catalysts

• AGM 20 Oct-22; ex-dividend (7-Sept-22).
• Dividend payable (21-Sept-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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