Company Reports

In 2018, the former Primary Healthcare rebranded itself as Healius to signify the strategic turnaround underway. Healius is looking to new sources of strategic growth as well as dealing with prior underinvestment in infrastructure. There is much to fix in the business and we anticipate it to take a few years before significant margin improvements are made in the base pathology businesses. Healius selling its medical centers and Montserrat day hospitals to focus on redirecting capital toward infrastructure upgrades and its diagnostic businesses is viewed as a positive strategic step. The impending sale of the Lumus Imaging also simplifies the business and shores up the balance sheet.

Healius has agreed to sell its imaging business, Lumus Imaging, to Affinity Equity Partners for AUD 965 million. The deal is subject to customary conditions, including approval by the Foreign Investment Review Board. Cash proceeds are estimated to be around AUD 835 million after repayment of equipment leases and other working capital and capital expenditure adjustments. This is a huge transaction for Healius, with imaging accounting for almost half of the fiscal 2024 group operating earnings. It leaves the company a pure-play pathology provider.

In 2018, the former Primary Healthcare rebranded itself as Healius to signify the strategic turnaround underway. Healius is looking to new sources of strategic growth as well as dealing with prior underinvestment in infrastructure. There is much to fix in the business and we anticipate it to take a few years before significant margin improvements are made in the base pathology and imaging businesses. Healius selling its medical centers and Montserrat day hospitals to focus on redirecting capital toward infrastructure upgrades and its diagnostic businesses is viewed as a positive strategic step.

No-moat Healius reported fiscal 2024 underlying revenue growth of 6% to AUD 1.7 billion and group EBIT of AUD 65 million, 3% above our forecast. The result was driven by cost and revenue initiatives in pathology with second-half group EBIT margin expanding 370 basis points on the first half to 5.5%. The firm improved its AUD 15 million net savings target for fiscal 2024 by AUD 5 million. Our long-term estimates are broadly unchanged, including our midcycle EBIT margin forecast of 14%.

No-moat Healius downgraded fiscal 2024 underlying EBITDA guidance by 5% at the midpoint to AUD 345 million to AUD 350 million. Improving pathology volumes over second-half fiscal 2024 have been offset by lower-than-expected average fees due to softness in general practitioner attendances and general inflationary pressures. However, Lumus Imaging and Agilex Biolabs have continued to perform well. The firm expects to better its AUD 15 million net savings target for fiscal-year 2024.

In 2018, the former Primary Healthcare rebranded itself as Healius to signify the strategic turnaround underway. Healius is looking to new sources of strategic growth as well as dealing with prior underinvestment in infrastructure. There is much to fix in the business and we anticipate it to take a few years before significant margin improvements are made in the base pathology and imaging businesses. Healius selling its medical centers and Montserrat day hospitals to focus on redirecting capital toward infrastructure upgrades and its diagnostic businesses is viewed as a positive strategic step.

Top pathology providers remain significantly undervalued following the supportive pathology policy changes announced in the federal budget.

Top pathology providers are significantly undervalued. Shares in narrow-moat Sonic Healthcare, no-moat Healius, and no-moat Australian Clinical Labs have fallen by roughly 60% on average since the beginning of 2022 and now trade at an average 35% discount to our fair value estimates of AUD 32.00, AUD 3.00, and AUD 3.50, respectively. Within the healthcare sector, pathology stocks screen attractively. The subsector trades at an average price/fair value estimate of 0.65 versus the healthcare sector average of 1.11. Our special report, 'Pathology Providers Are Down but Not Out,' published on May 13, 2024, delves deep into the key drivers supporting our forecast margin recovery for the industry.

We maintain our AUD 3 fair value estimate for no-moat Healius following CEO Maxine Jaquet’s decision to resign after serving as CEO for one year. The past year has proven challenging to navigate, with higher-margin coronavirus testing revenue largely disappearing while inflationary pressures mounted. This resulted in the company raising equity at a dilutive price in November 2023.

No-moat Healius’ first-half fiscal 2024 group revenue and EBIT fell 2% and 61% to AUD 849 million and AUD 16 million, respectively. This was largely due to higher-margin coronavirus revenue falling 97% but was broadly in line with our expectations. As flagged, first-half group EBIT excluding coronavirus testing was flat on last year, weighed down by rent and wage inflation.

In 2018, the former Primary Healthcare rebranded itself as Healius to signify the strategic turnaround underway. Healius is looking to new sources of strategic growth as well as dealing with prior underinvestment in infrastructure. There is much to fix in the business and we anticipate it to take a few years before significant margin improvements are made in the base pathology and imaging businesses. Healius selling its medical centers and Montserrat day hospitals to focus on redirecting capital toward infrastructure upgrades and its diagnostic businesses is viewed as a positive strategic step.

No-moat Healius downgraded fiscal 2024 EBIT guidance by 25% at the midpoint of AUD 70 million-AUD 80 million. This was due to industry growth moderating significantly late in 2023 because of softness in general practitioner attendances and resulting pathology referrals. GP shortages and cost-of-living pressures are hurting pathology growth, and given its own inflationary cost pressures, Healius must resize its labor and infrastructure costs. We reduce our EBIT forecasts by 15% on average over the next two years on 2% lower forecast revenue and margins contracting more than we previously expected. However, our long-term estimates are broadly unchanged, including our midcycle EBIT margin forecast of 14%.

In 2018, the former Primary Healthcare rebranded itself as Healius to signify the strategic turnaround underway. Healius is looking to new sources of strategic growth as well as dealing with prior underinvestment in infrastructure. There is much to fix in the business and we anticipate it to take a few years before significant margin improvements are made in the base pathology and imaging businesses. Healius selling its medical centers and Montserrat day hospitals to focus on redirecting capital toward infrastructure upgrades and its diagnostic businesses is viewed as a positive strategic step.

Australian Clinical Labs intends to withdraw its takeover offer for Healius after opposition from the Australian Competition and Consumer Commission. The ACCC concluded the acquisition would likely substantially lessen competition in Australian pathology services markets. The ACCC considered current competitors, including narrow-moat Sonic Healthcare, and believes it is unlikely that a new or existing provider could enter or expand in a timely way and to a scale sufficient to address the potential loss of competition.

In 2018, the former Primary Healthcare rebranded itself as Healius to signify the strategic turnaround underway. Healius is looking to new sources of strategic growth as well as dealing with prior underinvestment in infrastructure. There is much to fix in the business and we anticipate it to take a few years before significant margin improvements are made in the base pathology and imaging businesses. Healius selling its medical centers and Montserrat day hospitals to focus on redirecting capital toward infrastructure upgrades and its diagnostic businesses is viewed as a positive strategic step.

Healius benefited substantially in first-half fiscal 2021 from its involvement in coronavirus testing in Australia. While Australian community transmission of the coronavirus has fallen to very low levels in early 2021, the pandemic remains highly dynamic. Therefore, the ultimate earnings benefit that Healius will derive from it remains difficult to forecast. Nonetheless, with demand for coronavirus tests proving far more buoyant in fiscal 2021 year to date than we’d previously anticipated, we increase our full-year fiscal 2021 EBIT forecast by a sizable 33% to AUD 223 million. Also contributing to our upwardly revised estimates is a marked improvement in the performance of the day hospitals segment—with Healius day hospitals and Adora Fertility achieving maiden profits during the first half, ahead of our prior expectations. Accounting for the anticipated spike in fiscal 2021 pathology earnings and the improved medium-term outlook for day hospitals, we lift our fair value estimate by 4% to AUD 3.85 per share. Shares in the no-moat stock screen as fairly valued.

In 2018 the former Primary Healthcare rebranded itself as Healius in an effort to signify the turnaround underway. The new CEO, appointed in 2017, is looking to new sources of strategic growth as well as dealing with prior underinvestment in systems, revamp of physical spaces and legacy issues with stakeholder management. There is much to fix in the business and we anticipate it to take two years to see the major benefits from the turnaround delivered in the financial results. The COVID-19 impact of lost pathology and diagnostic imaging volumes in fiscal 2020, and expected to spill over into fiscal 2021, has stalled the turnaround, as it has exposed the combination of high operating and financial leverage. However, the business focus created by selling the medical centres in fiscal 2021, which were weighing down the turnaround, is viewed as a positive strategic step.

Healius’ efforts to strip cost from its Australian pathology and imaging businesses are bearing fruit in early fiscal 2021. Year-to-date cost reductions under its cost-out program--referred to as its Sustainable Improvement Program, or SIP--have tracked ahead of management’s previously announced medium-term target and our expectations. With Healius more confident its SIP can sustainably improve operating margins for its pathology and imaging businesses, we increase our fair value estimate for the no-moat name by 9% to AUD 3.70 per share. An increase in corporate overheads and near-term capital expenditures--required to realise cost-out targets under the SIP--provide a partial offset to our valuation uplift. Healius shares screen as modestly overvalued, trading at a 6% premium to our revised fair value estimate.

In 2018 the former Primary Healthcare rebranded itself as Healius in an effort to signify the turnaround underway. The new CEO, appointed in 2017, is looking to new sources of strategic growth as well as dealing with prior underinvestment in systems, revamp of physical spaces and legacy issues with stakeholder management. There is much to fix in the business and we anticipate it to take two years to see the major benefits from the turnaround delivered in the financial results.

We’d anticipated that Healius’ ongoing involvement in coronavirus testing would deliver a transitory boost to the no-moat name’s fiscal 2021 earnings. However, year-to-date demand for COVID-19 tests has tracked significantly ahead of our full-year expectations, driving a remarkable 17% sales growth rate in first-quarter fiscal 2021. The ultimate duration and severity of the global pandemic are unknowns, begetting substantial near-term uncertainty as to the precise magnitude and persistence of demand for COVID-19 tests. Nonetheless, we expect elevated levels of COVID-19 testing will remain throughout the remainder of fiscal 2021. Accordingly, we upgrade our fiscal 2021 group sales and EBIT estimates to AUD 1.77 billion and AUD 172 million, respectively. Our revised fiscal 2021 group sales and EBIT forecasts are 5% and 23% greater than our respective prior estimates. The outsize upgrade to fiscal 2021 operating income is the result of the substantial operating leverage that prevails within Healius’ pathology business. While our long-term expectations for Healius remain unchanged, the substantial near-term earnings upgrade drives a 3% increase in our fair value estimate to AUD 3.40 per share. Healius shares screen as overvalued, trading at a circa 10% premium to our revised fair value estimate.