Morningstar | Healius Shares Trading Close to Fair Value After Rallying Since January
After rallying approximately 35% since the beginning of calendar 2019, shares in Healius are now modestly undervalued relative to our unchanged AUD 3.50 fair value estimate. Major shareholder Jangho's takeover bid in early January 2019 was opportunistic, and the subsequent rejection by the board reflected our opinion that the AUD 3.25 bid undervalued the firm. Healius' large-scale medical centres generate dependable earnings, and its pathology division in particular enjoys competitive advantages--although not enough to warrant an economic moat rating.We expect Healius' medical centres to benefit from growing demand from Australia's ageing population. Increased government focus on preventative health should also help drive demand in the pathology and imaging divisions. Government payments remain responsible for most of firm's services, and while this has been beneficial to-date, potential increased regulation or budget cuts remain a threat, and could put pressure on earnings. We forecast the firm growing operating income at a CAGR of more than 15% over the five years to fiscal 2023.
The firm's pathology division enjoys a dominant competitive position. The wide network of blood sample collection centres located in or near medical centres serves as a deterrent to new entrants, and the division's scale delivers material cost advantages. We estimate Healius has a 35% share of the pathology market, positioning it as the number two provider behind narrow-moat-rated Sonic Healthcare. However, in contrast to Sonic, where the vast majority of earnings are derived from pathology, Healius' no-moat medical centre and imaging divisions dilute its pathology contribution which represent just one third of group earnings.
Primary Health Care is a medical center operator engaged in providing diagnostic imaging services and pathology services. Co. operates three principal operating segments: Medical Centres, which provides a range of services and facilities to general practitioners, specialists and other health care providers; Pathology, which provides pathology services; and Imaging, which provides imaging and scanning services from stand-alone imaging sites and from within the consolidated entity's medical centres.
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