At its annual meeting, Healius revealed that COVID tests during 1Q22 had exceeded 40,000 tests per working day. Diagnostic Imaging and Hospital divisions have been modestly impacted but should recover as lockdowns end.
Even with COVID-19 in full flight this time last year, Australian PCR testing has gone up by 217% so far this year. PCR testing has underpinned material gains for HLS in 1Q22 revenue which is up 44% to $689.9 million and EBIT of $201.9 million.
That level of EBIT represents approximately 60% of FY22f EBIT consensus forecasts before the trading update was released, implying FY22 market earnings upgrades.
CEO Dr Malcolm Parmenter told shareholders that he expects COVID PCR testing “will be a part of the health landscape for years” although testing levels will fluctuate.
We anticipate PCR testing levels to remain elevated through to FY23f, correlated with the re-opening of state economies and also with the Delta variant affecting states with low cases to date. Non-Medicare PCR testing is also growing.
Diagnostic Imaging revenues have fluctuated over the quarter, affected by lockdowns in NSW and Victoria but non-COVID testing should experience a recovery as lockdown impacts recede.
Day Hospital revenues are also down for the same reasons. HLS announced a new Montserrat Day Hospital and cancer centre will be developed in Perth making it the 12th short stay facility in Australia.
The company has invested in additional testing equipment despite the rising level of vaccinations. This is because as restrictions ease, it is expected that the Delta variant will continue to circulate.
Investment view
There is such an array of factors still in play that HLS has not provided FY22f guidance. The pool of unvaccinated people will sustain on-going infection and hospitalisation, while the re-opening of laggard vaccination states such as WA, SA, Queensland and Tasmania will necessitate the availability of testing capacity for some time yet.
In our view, COVID PCR testing will begin to ease in 2H21 and on through to FY24f albeit remain elevated. As anti-COVID drugs enter the treatment regime, these will require rapid PCR diagnosis. Rapid antigen testing could increase materially to complement PCR testing for screening and safe passage purposes.
We consider the possibility that the Federal government might reduce the price of PCR testing after the Federal election next year.
In the medium term, HLS is focused on building out its recurring earnings base.
It is possible the company may extend its share buyback, depending on cash flow requirements for capex and/or acquisitions.
We retain our Buy recommendation on HLS.
