BUY HOLD SELL – Healius (ASX: HLS)
Healius (HLS) is a leading healthcare company that operates three main segments – pathology, imaging, and day hospitals/IVF. Recent support has flowed from its involvement in COVID testing, the pathology unit hit the 3m tests milestone back in May. The emergence of the Delta strain signalling to some that testing is likely to remain a core part of earnings into FY22 even despite the vaccination roll-out. Recent headlines have centred around its IVF arm which has been the focus of several interested parties, Virtus Health (VRT) named as one potential candidate. There are reports management is also looking to divest its day surgeries business (not including short-stay hospitals or Montserrat associated day hospitals) and strengthen its imaging arm. Conjecture supported by its acquisition of Queensland-based imaging business, Axis Diagnostics. The day surgery business has been valued at ~$100m with upcoming results expected to shed more light on management’s plans for the business structure. 72% of HLS‘s revenue comes from its pathology business, 23% from its imaging and a meagre 4% come from its day hospitals. The breakdown illuminating why the business is likely looking to simplify its offering further after selling its Medical and Dental centres arm for $483m last year. Chief Executive Officer, Dr Malcolm Parmenter alluded to its high performing and ‘simplified’ portfolio in February, perhaps he was also foreshadowing plans for the future. The first half 2021 dividend more than doubled the 2020 half-year payout, buoying expectations of a healthy capital return to shareholders given ‘very strong’ operating cash flows in the third quarter. On the capital management front, HLS has completed more than 50% of its targeted $200m buy-back. May’s trading update also touched on organic margin growth from business simplification and efficiency adaptions. Main Observations:
- ROE is a little uninspiring at 8.4% and is expected to slip to 6.7% in FY23.
- EPS growth is expected to see a massive 172% increase, the number is likely to be distorted as the business cycles through weaker comparative data.
- It sits on a PE of 19.6x. Peers in SHL and RHC sit on 15.1x and 30.9x respectively.
- A gross yield of 4% is expected in FY21 which is above the market yield of 3.8% and its peers in SHL and RHC.
- 100% of the brokers surveyed by Thomson Reuters have a Hold or Buy recommendation.
- It is trading at a 4.4% premium to the average broker target price and a 10.3% premium to intrinsic value.