As the massive two-year PCR testing bulge recedes, Healius is rethinking its post-COVID priorities. The company is using its large COVID cash pile to reinvest and acquire growth. The Montserrat day hospital business is to be divested. The recently acquired Agilex (clinical trials) business is yet to prove its worth.
HLS’s investor day unveiled the company’s new stripes. It is shifting away from ‘care’ and towards diagnostics and testing. The day hospital business has underperformed since being acquired in FY19 and is to be sold. Together with a huge haul of cash generated from PCR testing, HLS is now seeking to reinvest in three strategic priorities. These are:
- AI driven diagnostic decision support for prevention and treatment of diseases
- Digital customer interactions between doctors and patients
- Next generation of information systems for clinicians
The big picture shows why HLS is taking this pathway. With over 10k GPs and Specialists across the country referring to HLS who routinely need fast and efficient diagnostic test results, HLS can unlock significant value through its strategy and improve health outcomes for the 12m Australians it reaches.
HLS’s SIP (sustainable investment program) Phase 2 is 25% complete. SIP is on track for $67 million in EBIT savings (net of $12 million costs) by the end of FY23f. The program will bring margins up to peer company levels.
The new Agilex clinical testing business is a core part of the future. It is too early to pass judgment on this strategy, but we know that Australia is a core destination for clinical trials, particularly pre-clinical and Phase 1 testing that requires fast turnaround data at low cost. HLS is still working through the early synergies, but the key aspect is the diversification this business brings, with a light capital requirement.
Investment view
Australian PCR volumes are clearly subsiding and have averaged 123k per day in 2H22f so far compared to 186k average per day in 1H22. The new Federal Government may take another look at the pricing for PCR tests as part of its budget process.
It may be some time before we can let the COVID dust settle and obtain a clearer picture of the new HLS strategy. There are reinvestment risks to be considered and although the company is financially flush, we see no urgency to acquire the stock.
Risks to investment view
New variants of COVID might reactivate mass testing volume growth, but our view is COVID will become endemic.
Recommendation
We have retained our Hold recommendation.
