EUR 850.00 For Business Accounts Only

Morningstar | Soft Volumes Weighing on Healius’ Near-Term Performance Are Unlikely to Continue

No-moat Healius reported underlying net profit after taxes of AUD 39 million for the first half of fiscal 2019, down 10% from the prior corresponding period. The weak performance reflected soft market conditions across all divisions, mostly driven by the benign winter flu season. However, we do not expect these conditions to continue and expect volumes to eventually revert toward the historical norm. The second half of fiscal 2019 should improve, as efficiency initiatives in pathology and imaging contribute an approximate AUD 10 million EBIT uplift. The board declared an interim fully franked dividend of AUD 3.8 cents per share, which represents an approximate 60% payout ratio that we believe can be sustained through the cycle.

Management said it expects fiscal 2019 underlying NPAT of between AUD 93 million and AUD 98 million, slightly below our previous forecast. We have trimmed our fiscal 2019 NPAT estimate by approximately 6% to AUD 96 million, although our long-term thesis is intact, and we maintain our AUD 3.50 per share fair value estimate. Despite the challenging near-term conditions, we continue to believe the stock is attractively valued. The long-term outlook for Healius’ services remains positive, and we forecast high-single-digit EPS growth over the four years from fiscal 2020, underpinned by the growing and aging population, advancements in medical technology, and rising cancer survival rates.

Pathology’s revenue rose by 3% during the first half, reflecting solid fee growth and increases in specialties, although this was offset by softer volumes, which grew by a modest 2%. This volume softness is temporary, in our opinion, and we expect improvement over the remainder of the year, and over the long term we continue to forecast growth of around 4%-5% per year. Disappointingly, EBIT declined by 15% as a consequence of the softer volume and less favourable mix along with the loss of the bowel screening contracts and higher labour costs. In response to the challenging short-term market conditions, the company is undertaking productivity programs that are expected to deliver savings over the next year that should help margins recover by around 150 basis points to approximately 14% within the next three years.

Medical centre EBIT declined by 2%, reflecting doctor departures and a less-favourable mix shift. We forecast improving earnings in the coming years, on the back of a strong pipeline of new doctors and an increasing number of general practitioners, along with cost savings through the transformation program Project Leapfrog. This initiative is aimed at increasing utilisation of the medical centre footprint, by improving appointment management, self-check in kiosks, and online capabilities, which would enable patients to join the queue remotely.

Imaging was the strongest-performing division during the half, though it remains the smallest earnings contributor. Within the division, revenue and EBITDA grew by 9% and 13%, respectively, on the back of ongoing strength in CT and MRI modalities, despite the general market softness. This segment should also benefit from ongoing productivity initiatives, along with increased IT investment.