Healius Enjoying Testing Times

Australia | Dec 11 2020

Having divested of its medical centres, Healius has initiated a buyback, revised its dividend policy and outlined new profitability targets

-Around $80m in savings targeted by FY23
-Risks from rapid fall in covid-19 testing
-Assets under earning at present

By Eva Brocklehurst

In the aftermath of its medical centres divestment, Healius ((HLS)) has offered no new strategic initiatives, although has confirmed intentions regarding optimising the existing business and strengthening its day hospital specialty.

Having received $483m in proceeds from the sale of the medical centres the company will allocate a portion to debt repayment and now has a solid balance sheet that affords room for capital management.

Capital management plans include a $200m buyback and the dividend policy has been revised to 50-70% of reported net profit. Credit Suisse calculates around $600m in excess capacity for acquisitions before Healius reaches its target gearing range.

The broker also estimates, if all cost reductions are achieved and the share buyback completed, this could result in 15% growth in earnings per share from FY19-23. Given the high level of execution risk, particularly as savings centre on labour management, the broker is more modest in its forecasts and assumes 13% growth.

Under its sustainable improvement program Healius expects $80m of annualised savings by FY23. Ord Minnett suspects this is ambitious but highlights the size of the opportunities, with a potential 40-50% boost to earnings from cost savings over the next 2.5 years.

The company has earmarked $50-100m for acquisitions and the broker has been encouraged by recent results from the Monserrat day hospital, although acknowledges it is too early to judge this venture a success.

Healius has signalled more than 300 basis points of margin upside is in the wings from its profitability improvements. New targets for pathology and imaging earnings (EBIT) are $180-$190m and $60-65m, respectively.

Citi forecasts a more muted 100 basis points margin increase, given execution risk and the mixed track record. While the pathology and imaging assets have strong positions in defensive and growing markets the broker is less convinced about the expansion into day hospitals.

UBS anticipates earnings margins will remain elevated albeit below the 16.5% experienced in the first quarter. This view stems from a more “normalised” revenue mix.

Healius has delayed the implementation of a laboratory information system by a year, to FY24, and the total cost is now expected to be $105-110m for an annual benefit of $15-20m from FY24.

Having been freed from the underperforming medical centres, Morgan Stanley assesses the investment case centres on quantifying the benefit from continued coronavirus testing and the deployment of capital from a de-leveraged balance sheet. Critical to sustaining the share price will be confirmation the company can hit margin targets.

Macquarie agrees the opportunities for margin improvement underpin a positive investment view, as well as the growth options that reflect an improved position for the balance sheet.

Covid-19 Testing

Strong growth in pathology throughout October and November has been underpinned by coronavirus testing and the company is dealing with 7,000-10,000 tests per working day.

Goldman Sachs calculates that number would drive an annualised revenue contribution of $100m, and probably at an accretive margin. The base pathology business has also recovered but remains flat. Goldman Sachs forecasts 14% organic pathology growth in FY21, including coronavirus testing.

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