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Date : 17/02/2023

Healius

ASX :

HLS

Market Cap : $1.75 Billion

Dividend Per Share : $0.16

Dividend Yield : 5.29 %

Sell

52 Week Range : $2.64 - $4.64

Share Price : $3.02

HLS is under pressure from industry headwinds and balance sheet weakness. As the conditions linger on, we recommend a 'Sell.'

Company Analysis

Shares of diagnostic services provider Healius (ASX: HLS) recovered some of the losses incurred after the company reported its unaudited revenues and EBITDA earlier this month. Healius was an absolute beneficiary of numerous COVID-19 tests conducted during the pandemic and saw its earnings and share price rising to record-high levels by the end of 2021. But since then, its share price has lost more than 40% of its value as COVID-19 testing numbers started to decline, and its Pathology and Imaging segments’ revenues and profit margins started to reflect the pain inflected by increasing wages, GP and labour shortages and other increased costs of doing business.

Healius sold out of its entire Day Hospitals division

Healius has been operating as a leading healthcare company in Australia for more than 30 years. When we first wrote about Healius in June 2022, the company operated through three segments, Pathology, Imaging and Day Hospitals. The Pathology and Imaging segments offer a wide range of diagnostic services, and the Day Hospitals segment enables independent healthcare professionals to deliver care in its 11 day hospitals. However, in December 2022, the company announced the sale of its Day Hospitals segment for an enterprise value of up to $138.6m to Nexus Hospitals. Healius had acquired the Day Hospitals business in 2018 for $122m.

The company said the sale of the Day Hospitals business was in line with the company’s strategy to focus on the growth of its diagnostics business and to use the sales proceeds to strengthen the company’s balance sheet. HLS expects to receive the cash proceeds at the end of March 2023. The company’s bank gearing ratio as of 31 December 2022 was about 3x, which was only slightly less than the covenant ceiling of 3.5x. This is an indication that HLS’s balance sheet is not strong, based on the available information at present. The company has not prepared its 1HY23 audited results yet, including its balance sheet at the end of the period to give us a better picture of the company’s most recent financial position.

Earnings from COVID tests are disappearing while high inflation is eating into profit margins

Healius saw the cessation of large-scale COVID-19 testing in 1HY23. The testing revenue in the period dropped by a massive 88% compared to 1HY22 and stood at $64.4m. HLS reported a COVID-19 testing number of about 3,500 per working day in November and December 2022, and it expects the number further drop to 1,000 to 2,000 tests per working day in 2HY23.

Despite a 2.2% growth in the Pathology segment’s revenue, the segment’s EBITDA in the period dropped by a whopping 71%. The company attributed the drop in profitability to headwinds currently affecting the economy and the healthcare sector, including staff shortages in frontline roles, GP shortages and a decline in GP bulk billing rates, and a higher than historical number of tests requested per GP referral after a hiatus in regular testing during COVID-19 outbreaks. This increases coning under the Medicare Benefits Systems, as under these systems, generally only the three highest value tests are reimbursed for GP-referred requests. The Imaging segment was the best-performing business of HLS as its revenue increased by 6.6% and EBITDA increased by 7.8%. Overall, the company’s total revenue in the period dropped by 33.6% to $889m, from $1,339m in 1HY22, and its EBITDA from continuing operations fell to $182m, from $504m in PCP.

Investment Thesis

Healius’s business sounds very defensive in nature; people will continue to use diagnostic services regardless of the economic cycle, and it’s a capital-intensive business that limits the danger from new entrants, so it should have a relatively steady profit margin throughout different business cycles. But the company’s historical financial performance shows a different picture.

As you can see in the above line chart, HLS’s revenue experienced a gradual and steady increase in the last ten years, but its gross profit margin (in percentages of revenue), as well as its earnings, fluctuated quite significantly through this period. And looking at the company’s long-term share price chart (at the end of the article), we again see the cyclicality and intense volatility in the stock’s price, which is again despite the apparent defensive nature of the stock.

HLS’s stock is covered by 15 analysts, and based on their consensus estimate, the company is expected to generate 7.7 cents earnings per share in FY23, representing an 85% drop in the company’s earnings for that year before experiencing a substantial recovery of 80% in FY24 earnings to 14 cents per share. Based on those numbers, HLS’s stock is now trading at Price-to-earnings multiples of 36.5x and 20.2x for FY23 and FY24, respectively. Given the market’s current P/E multiple of around 15x, HLS’s forward P/E multiples leave limited upside potential to its share price.

How to play Healius’ stock?

Even assuming the current economic and industry headwinds for HLS’s business will resolve over the course of the next one to two years, and the company’s profitability will recover to its pre-pandemic levels, it will only be justifiable for its share price to recover to the pre-pandemic highs around $3.30 at the very best (the green line on the chart) in the medium to long-term, especially considering the company has sold out its Day Hospitals division and will never recover the earnings from that segment. This represents an approximately 10% upside potential to the current share price of $3.00.

On the other hand, if the company’s current unfavourable operating environment continues for longer than hoped for by the market, its share price can once again see lows of around $2.00 (the blue line on the chart) in the long term. This represents an approximately 30% downside risk to the current share price. From a technical analysis perspective, HLS’s share price is on a long-term downtrend as well (the red trendline on the chart), which indicates a bearish sentiment on the stock. As such, we recommend a “Sell” on Healius’ stock.

 

Weekly Chart in Semi-log Scale (Source: Metastock)

 

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