Healius Limited (HLS)
HOLD

Feeling unwell

 29 Nov 2022
Sector: Health Care

TRADING UPDATE

Need To Know

  • Earnings margins are compressing as the cost base remains elevated and COVID volumes unwind.
  • The company is undertaking a structural reset in the cost base.
  • Ex-COVID business operations continue to grow. Re-iterate HOLD rating as structural reset comes underway.

Overview

Healius has updated the market on trading conditions for the first 4 months of FY23. Covid benefits are unwinding at a faster run rate than expected whilst costs remain elevated which is compressing margins.

The revenue base is falling away quicker than the market was expecting. The first 4 months of the year suggest a ~31% decrease in total revenue whilst the market was looking for a full year decline of ~20%. The group is continuing with its cost reset project which will shift costs into a more flexible and nearer-term model. The speed, timing, and shape of the reversion in pathology remains unknown and management has indicated that its unpredictable where it will land in the long-term growth trend. Medicare data suggests that it’s likely that the growth rate returns to pre-COVID levels.

Headwinds remain in the broader healthcare sector, these being frontline and GP staff shortages, declining bulk billing rates, and a higher number than expected of requested tests. The headwinds are expected to be transitory rather than structural as Australia’s aging population fosters a stronger need for imaging and diagnostic services.

Investment Implications

It’s a similar story to what has been seen elsewhere in the healthcare sector. COVID-19 beneficiaries’ margins are compressing due to elevated costs and a rapid unwinding of COVID-19 benefits. Management suggest that imaging revenues are growing at a strong run-rate in November and Pathology (ex-COVID) is growing steadily.

Valuing a deceleration of activity and earnings is a difficult task for investors.

Post-COVID, Healius is expected to have delivered ~A$80m more revenue in FY23 vs FY19, net debt having fallen A$120m, shares on issues decreased by ~6% and cumulative dividends over the three-year period (2020-2022) being ~1.85x higher than the pre-COVID base case.

The multiple for the stock on a forward EV/EBITDA basis at ~7.5x is in line with pre-COVID levels. Broadly we believe the business is fairly priced. We rate HLS a HOLD.

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Stock overview

Share Price

Company overview

Healius Limited is an Australia-based healthcare company. The Company operates through three segments: Pathology, Imaging, and Day Hospitals.

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