Getting back to normal

RESULTS ANALYSIS

Need To Know

• In-line result. Operating conditions returning back to normal. Cash conversion strong. Cost reset progressing well.
• Balance sheet improving. Gearing and interest cover within covenant. 
• No quantitative guidance. Conditions normalising with momentum expected to continue through FY24.

FY23 Result Overview:

Revenue A$1707m vs A$1731m consensus (-1.4% miss)

EBITDA A$376.2 vs A$374.1m consensus (in-line)

EBIT A$99m vs A$100m consensus (in-line)

Gearing ratio at 3.48x, covenant of <4x

Investment Implications

Earnings largely in-line with consensus expectations. COVID revenues are continuing to come out of the business, down 89% (vs FY22) to A$83.8m. BAU revenue continues to improve, up ~A$97m (~6.3%) on FY22. This is another indication that the business is trending back to normalised operating conditions. Cash conversion strong for the period at 108% of underlying EBITDA to operating cash flow. Specialist segment run-rate suggests momentum is slowing into 1H24. 

Substantial cost reset continues to progress. Labour productivity was up ~8% for pathology and ~9% for imaging versus pre-COVID. Group consumables costs as a percent of revenue are expected to be held at ~13%.

The balance sheet is improving, with net debt down in the period, and gearing still below covenants. Gearing ratio increased from ~3x to 3.48x, still below the covenant of <4x. Debt 72% is hedged (up from ~35% in 1H23). Net debt was A$447m, down from A$525m in FY22. Interest cover is 4.81x, covenant >3x. 

Outlook

Expect to see volumes trending higher in 2H24.

Imaging market to continue current momentum through FY24.

Gearing to remain within the <4x covenant.

Board intention for a re-instated dividend once normal market volumes return.

FY24 Maintenance CAPEX expected to be A$40-A$50m.

Investment View

With the cycling of COVID testing volumes coming close to its end, the company can return its focus to the growth of the base business. 

Competition for pathology remains intense, with newer entrants such as 4cyte growing sites aggressively. Medicare data is starting to show some recovery momentum for pathology volumes. We expect competition and margins to remain under pressure in the near-term which we would like to see abate before viewing the stock more favourably.

We believe the worst is likely over and the downgrade cycle is reaching its end although note that there remain risks to margin recovery. 

On an FY25 PER multiple of ~17.5x, the stock is in-line with its longer-term average multiple. We expect the share price will remain volatile as the normalisation of the cost and earnings base progresses. We retain our Hold recommendation.