Just a few weeks after Healius’s strategy day, the company has revealed how quickly PCR testing volumes are dissipating. After a stellar 1H22, HLS will fall over the finish line.
Australian average daily PCR testing in 2H22f has dropped to 112k after peaking at 186k in 1H22 (see Figure 1). May testing volume has fallen further to a daily average of 86k. HLS average daily testing had slowed to 15k per working day from February to April and has likely slipped to around 11k per day in 4Q22f.
We anticipate national PCR testing falling to around 40k per day or approximately 10-15% of base pathology volume.
Pricing was also cut by 15% from January 2022 although this may now also include additional testing including influenza.
HLS’s core pathology revenue (ex-PCR) was only modestly ahead of a -8% Medicare turnout and Diagnostic Imaging was also only modestly ahead of negative Medicare data.
HLS now says 11 months trading EBIT is $473 million with 79% of this achieved in 1H22. This suggests FY22f EBIT will land just short of $500 million. This is still below a consensus forecast of $510 million that was at $556 million in late May.
Margins are under pressure from a weak underlying pathology recovery and collection site infrastructure remaining in place. We think this margin deterioration could persist into FY23-24f with a material impact on earnings.
Finally, with a new Federal Government eager to sniff out easy cost cutting measures, PCR testing may join the casualty list.
Investment view
HLS’s recent strategy update was ostensibly encouraging with a pivot away from ‘care’ (day hospitals for sale) and towards diagnostics and testing. The balance sheet is flush with cash, but shareholders are being asked to trust the investment prowess of management to effectively invest in a digital future.
The COVID-comedown has been swift and although HLS has filled its pockets, we are pensive about the immediate future. Further capital returns are a possibility as well as acquisition activity. We still see no urgency to own 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.
