Healius (ASX: HLS) is one of Australia’s leading healthcare companies providing high quality, accessible and cost-efficient healthcare services through its Pathology, Imaging and Day Hospital businesses. With a unique footprint of more than 2,000 locations and 11,000+ employees, Healius provides specialised diagnostic services to consumers and their referring practitioners and enables a range of independent healthcare professionals to deliver patient care in partnership with Healius’ nurses and support teams.
Source: Tradingview.com – HLS 5-year share price performance
Healius has three complementary business units which contribute to diversified revenue streams
Healius operates in a niche market with three complementary businesses, pathology, imaging and day hospitals:
Healius Pathology business is one of the country’s leading private medical laboratory and pathology services providers, operating 95 medical laboratories and over 2,000 patient collection centres across cities, regions and remote Australia. The Company offers leading medical laboratory and pathology services across its key diagnostic activities through various established state-based and specialty brands, including anatomical pathology, clinical pathology, genomic diagnostics and veterinary pathology. Healius Pathology employs around 200 specialists and over 6,000 scientists, technicians, and collectors.
Healius Pathology brands include QML, Laverty, Dorevitch and Western Diagnostic Pathology, which operate in Queensland, NSW, Victoria and South Australia, Western Australia and Northern Territory, respectively. Key specialty brands include Genomic Diagnostics, which is Australia’s leading non-government diagnostic genetic sequencing facility. Healius Pathology is clearly a leading provider in its branch as it provides one in every three pathology services in Australia annually. These services extend from exclusively servicing some of Australia’s largest and most complex private and public hospitals to regional areas and remote Australian Aboriginal communities.
Moreover, the Company has recently played a pivotal role in Australia’s public health response to the COVID-19 pandemic. It has conducted more than six million COVID-19 tests to date. The extensive community COVID-19 testing, collected through its division’s 89 dedicated sites, several hospitals and aged care facilities, was supplemented by Healius Pathology’s commercial and direct-to-consumer initiatives, including testing at workplaces.
Healius’ Imaging division, now known as Lumus Imaging, operates a network of sites across the country in partnership with over 110 independent radiologists. Lumus Imaging manages over 130 sites, comprising stand-alone community imaging centres and imaging facilities within private and public hospitals and medical centres. Lumus Imaging provides professional and support services to radiologists, enabling them to focus on providing quality care to their patients. This business division employs highly-trained radiographers, sonographers, nuclear medicine technologists, nurses, centre support and corporate teams. A full suite of modalities and services are offered, such as X-ray, ultrasounds, etc.
Radiologists undertake imaging services, including specialist women’s health, cardiac, neurology, vascular, musculoskeletal and dental imaging. Importantly, each year, the Company performs over 3.3 million radiography examinations conducted in Lumus Imaging’s sites.
Healius operates the Montserrat Day Hospitals. This business comprises 11 Day Hospitals, of which 10 of these are stand-alone, and one, called Warringah Day Surgery, is located within a medical centre in Brookvale, Sydney. The stand-alone hospitals comprise Westside Private, a multi-specialist, short-stay hospital, six smaller stand-alone day hospitals, and three haematology and oncology clinics that conduct over 50,000 procedures a year. Founded in 1996, the Montserrat Day Hospitals operates well-run facilities that are strategically located and accessible to specialists and patients. About 500 doctors work across Day Hospitals, providing services in speciality types, such as ENT, Dermatology, Surgery, and a wide array of other services.
This business division of Day Hospitals plays an important role for Healius, as it delivers referrals to the pathology business and diversifies funding into non-Medicare revenue for the Group.
FY22 onward outlook: Healius strives to deliver sustainable growth through business improvements and the development of new opportunities
Healius intends to deliver sustainable growth through six approaches: portfolio management, capital management, sustainable improvement programme, digitisation, rebranding to Lumus Imaging, and development and expansion of its short-stay hospitals business.
Over the past two years, we have seen Healius pursuing its strategy to realign its portfolio to deliver higher returns and a stronger growth profile. This involved the Company strengthening its balance sheet and focusing on its core diagnostic while growing its Day Hospitals businesses. We have been pleased to see that this strategy has worked so far, resulting in successfully completing the Healius Primary Care (HPC) divestment in November 2020. Another achievement was Adora IVF which was brought to market in May 2021 with a sale announced in August last year. During the period, Healius also completed the acquisition of Axis radiology, an Imaging bolt-on. Along with these strategic reallocations of its assets, Healius also did pretty well in terms of operation by developing a pipeline of opportunities to capture the emerging demand for short-stay hospitals. We expect Healius, through its ongoing assessment of synergistic opportunities, to further scale its diagnostics businesses.
Another approach to sustainable growth for Healius is via its capital management review, which was undertaken and started in December 2020. Healius has considered options to deploy its HPC sale proceeds and reviewed its sustainable dividend policy, providing certainty to shareholders and flexibility to the business. Furthermore, the Company has readjusted its capital with headroom for short, and medium-term growth scenarios, including a buffer for future shocks. We also witnessed Healius wisely eliminate its surplus debt facilities and optimise its funding costs. Most importantly, the outcomes of this review were an on-market share buy-back aiming to return up to $200 million, with $101 million completed in June 2021 and primarily funded from operating cash flow. Furthermore, Healius revised its dividend payout target range of 50% to 70% of reported NPAT, together with an ambition to secure long-term dividends growth.
Healius Sustainable Improvement Programme (SIP), digitalisation, restructuring, and expansion
Healius plans to achieve its Sustainable Improvement Programme in five distinct steps:
SIP Phase I: aggressive cost savings successfully achieved during the year: The Sustainable Improvement Program (SIP) was introduced at the end of FY19 to systematically reduce costs and improve efficiencies across the Group. Healius has identified large addressable opportunities in its key pathology and Imaging labour sector, pathology property, and consumables. The Company has set a target of $70 million in savings, representing 4% to 5% of the cost base, for Phase I, focusing on immediately addressable cost reduction. In the first half of FY21, Healius achieved its phase I target with $68 million annualised savings delivered, including $10 million in Healius Primary Care (HPC), which was about a year ahead of schedule. In total, over 200 initiatives were delivered. Key initiatives included the delayering of middle management, role consolidations, laboratory consolidations in Pathology, and a move to zero films in imaging. Complementing SIP Phase I, a cost-out programme, was initiated at the end of FY20 to reduce the cost overhang arising from the sale of HPC. Healius has set a target of $15 million annalised savings to be delivered by the end of FY22. Although we have been pleased to witness that the Company successfully reached its target during FY21 ahead of schedule. Healius support costs now benchmark favourably compared with other healthcare and services companies. $83 million in savings to the Healius cost base has been delivered between FY20 and FY21, representing $73 million in continuing operations. Overall, Healius is now a leaner and more flexible business.
SIP Phase II: With the initial cost-saving and containments targets met in FY21, Healius’ strategic focus was expanded to deliver margin growth. The Company’s target is for 300 basis points of EBIT margin growth in Pathology and Imaging by FY23 and to build longer-term capabilities in capital management, data-led operations, customer-centricity, product and innovation, and network optimisation. Healius has set a clear objective to achieve these broader outcomes, attainable through higher-value structural improvements and growth in non-Medicare revenue. These outcomes are also dependent on the extent and timing of the COVID-19 pandemic and its ongoing impact on operations. Notwithstanding the pandemic operational challenges, Healius continues to progress on its SIP Phase II, with digitisation and automation, including developing an e-commerce platform. Furthermore, the Company significantly improved the fuel efficiency in its collection fleet by installing monitors. Healius also implemented during the period the first large scale AI-radiology read assistance tool for chest X-rays. The Company has also completed its Pathology ACC network optimisation and has further rationalised its imaging footprint and shifted to cluster-based multimodality clinics. The optimisation of data management supported workforce management by embedding richer data reporting for management and front-line staff. Healius also reviewed its sourcing and re-tendering categories, including consumables, after-hours reporting, and equipment maintenance.
Digitisation: Healius’ current Pathology Laboratory Information System (LIS) is working well and has supported over six million COVID tests, over and above business-as-usual pathology volumes. During the period, Healius has undertaken several innovations supporting COVID testing. For instance, the Company has deployed a QR-code based digital order automation. Healius also launched an e-commerce platform suitable for existing and future COVID and non-COVID products, broadening the Company’s reach and improving access to services for its customers. Healius is also continuing its technology modernisation programme in Pathology to deliver an end-to-end, customer-centric platform to standardise test panels and results via a modular approach. This platform will allow effective prioritising of patient and doctor touchpoints. But most importantly, it will allow Healius to leverage synergies across Pathology and Imaging. As part of this modernisation, Healius is expanding its internal technology capabilities and partnering with high calibre technology service providers to augment its internal capacity. The programme costs approximately $85 million to $90 million and is expected to take two to three years to complete. This programme will enable Healius to deliver benefits in operating cost efficiencies and increased referral revenue upon completion.
Reorganising its branding with Lumus Imaging: Healius has the objective to be a customer-centric healthcare business. Accordingly, the Company recently rebranded its diagnostic imaging division from Healthcare Imaging Services to Lumus Imaging, unifying its imaging businesses under one national brand. With a new logo and colour scheme aligned to Healius, the rebrand will see a stronger customer focus, improvements to the Company’s online presence, and a more modern service delivery. In addition to refreshing its brand identity, Lumus Imaging is updating services, focusing on digital capabilities and enhancing the way the business interacts with its patients and referrers.
Development and expansion of short-stay hospitals: Driven by improving surgical technology, lower costs and comparable, or often superior, patient outcomes, the healthcare industry is starting to shift away from higher-cost overnight procedures towards short-stay hospital procedures, with the number of private day hospital admissions in Australia doubling in the last 10 years. Cancer treatments, cardiology, orthopaedic procedures and general surgery are projected to grow strongly in the short-stay hospital setting. This mirrors the trend in the United States, where over 5,000 Ambulatory Surgical Centres exist, offering a wide variety of surgeries. At Westside Private Hospital, Healius has successfully trialled hip and knee replacements in a short stay setting. Short stay hospitals are seen as a key growth area for the business, albeit one which needs to be developed rather than acquired. Accordingly, Healius is progressing a pipeline of greenfield and partnership opportunities to capture growth in this emerging market.
With a strong capital position, we believe Healius is well placed to fund its growth investments where there are synergies with existing businesses. During FY21, Healius Pathology invested in a new laboratory in Western Australia and acquired a small histopathology business in NSW. Lumus Imaging invested in regional NSW, opening a comprehensive imaging centre in Orange, and in early FY22, the Company acquired small radiology practice in Queensland to complement its existing footprint. In December 2020, Healius announced an on-market share buy-back aiming to return up to $200 million to shareholders in 2021, with $101 million completed by June 2021, funded primarily from operating cash flow. Healius is also committed to sustainable dividends, with the Company announcing a lucrative dividend payout ratio of 50% to 70% of reported NPAT, with a stated aim of growing dividends in real terms over time.
The Australian healthcare sector has a reputation among the investors to be a safe haven. However, 2021 was somehow a sluggish underperforming year for the ASX-200 Healthcare index. In our opinion, we think that 2022 could be the year where the sector could rebound strongly.
In another year impacted by the COVID-19 pandemic and lockdowns, the healthcare sector followed an eerily similar trajectory to 2020, a huge correction in March, followed by a bumpy recovery.
We believe that the sector’s underperformance last year should not dampen the outlook for 2022 and beyond. The recent weakness in the sector was due to a broad shift into more cyclical plays. Some of the healthcare names got hurt by that. However, looking at the sector’s long-term record, the ASX-200 healthcare index appreciated over the past five years by more than 76% compared to 25% for the ASX-200. Over the long run, healthcare is one of the highest returning sectors year-on-year, and it is seen as a safe haven in that aspect. Accordingly, we are convinced of a positive outlook for the sector with upcoming deals and substantial capital raises.
Healius is at the front and is a key partner of Australia’s public health
2021 was a pivotal year for Healius. During the first half of FY22, Healius played a crucial role in Australia’s public health response to the COVID-19 pandemic through community and commercial testing during the Delta and Omicron outbreaks. In response to surges in demand, Healius expanded, automated and improved its PCR testing capacity, efficiency, and turnaround times. The Company is investing further to prepare and increase collaboration with the authorities for the national response to future COVID-19 variants. Importantly, Healius continues to provide non-COVID pathology, imaging and day hospital services despite the impact of various state-based lockdowns and isolation requirements.
Commercial testing in Pathology and above-market growth in some of the imaging’s key states were the highlights during the first half of the year. The demand for services is expected to return as states open up, including a catch-up period for the backlog in routine care, which has resulted from pandemic delays and general community fear of healthcare settings.
In the first half of the year, Healius achieved significant growth in its underlying revenue. The main driver was the Company’s EBIT and NPAT compared to the prior comparable period with COVID-19 testing. The Sustainable Improvement Program (SIP) also contributed to the successful cost containment in an increasingly inflationary environment. In particular, labour costs were held at 36.7% of revenue compared to 44.1% in pcp, demonstrating the economies of scale available to the business when costs are well contained. In addition, Healius did very well with its property, and IT expenses, which were held below 5% growth compared to pcp.
Healius did an excellent job during the first half of FY22 to maintain a steady cash flow. Thus, gross operating cash flow in the period was strong and normalising for the impact of the exceptionally high volumes of COVID-19 testing in the last two weeks of the year. This led to an EBITDA conversion of well over 90%. Moreover, the Company has materially lowered its capital intensity following the divestment of HPC in the first half of last year, and its balance sheet remains conservatively geared, positioned to fund growth and meet the ongoing capital needs of the business while maintaining a liquidity buffer.
Also, during the period, Healius completed the acquisition of Axis Radiology and announced the development of the Murdoch day hospital, the cancer centre in Western Australia and the acquisition of Agilex Biolabs, a leading bioanalytical laboratory.
Importantly, Healius rewarded shareholders by completing its announced buy-back and the FY21 final dividend payment, totalling $140.8 million. Considering the Company’s robust performance, the board determined to raise its interim dividend to 10 cents per share fully franked, compared to 6.5 cents per share in the first half of FY21 and 6.75 cents per share (2HFY21).
Healius achieved significant growth in results and progress on strategy during the first half of FY22
In a nutshell, Healius has demonstrated:
- Strong performance in all its underlying businesses
- An unceasing commitment of its teams underpinned strong COVID-19 testing
- Continued improvement in operating margins
- Meaningful progress in strategic initiatives, notably with the Agilex acquisition
- A strong ability to accelerate its routine healthcare services and ongoing baseload COVID testing
- Commitment to enhance COVID-19 investment to improve efficiency should further variants emerge
The pathology business delivered strong growth, up 56% PCP
During the first half of FY22, Healius Pathology delivered revenue up over 56% to $1.1 billion contributing to substantial growth in EBIT, up nearly 200% to a historic high for a half year of $375.8 million. COVID revenue was the prime driver of growth, but significantly non-COVID revenue was also up by 3%. The Pathology business plays a key role in the national COVID-19 testing regime. The division has conducted over 11 million COVID-19 tests, with over 40,000 tests per working day undertaken in the first half of the year. Healius Pathology also undertook extensive commercial and direct-to-consumer COVID-19 testing, including for Federal and State government bodies, workplaces, and travellers.
During the period, Healius invested in its testing capacity and drive-through footprint and delivered efficiencies, including automation upgrades to reduce its cost per test and turnaround times while improving its consumer experience.
Good growth was achieved in the commercial channel, including the speciality area of veterinary testing, which was up 11%. It is expected that non-COVID revenue will return as states open up, including a catch-up period for the backlog of routine pathology services. Under the SIP programme, Healius Pathology improved its EBIT by optimising its network, closing 27 poorly performing and low margin sites. Healius also selected a new supplier to improve courier routing, and pilots are trained to improve laboratory workflows and deliver ACC automation.
Overall, the EBIT margin of 34% demonstrated strong operating leverage on volumes achieved together with the early benefits of the SIP programme. A total of $13 million was invested during the first half of the year in digital platform integration, PCR rapid testing equipment and pre-analytics automation. The Company also upgraded its main laboratory testing equipment, called the Serum Work Area, which is nearing completion.
Late in the period, Healius acquired Agilex Biolabs, representing a strategic adjacency in Pathology offering a high-margin capital-light growth profile, revenue diversification, and a platform to enter the global clinical trials sector.
Imaging business performance remains flat despite challenging trading conditions due to COVID-19
Healius imaging business delivered broadly flat revenue during the first half of the year, reflecting the industry-wide impacts of COVID-19 and elective surgery restrictions. State-based differences were evident, including an above-market performance in Victoria and Queensland compared to the first half of FY21. Conversely, NSW grew in the market, excluding the unique effects of the Delta-driven lockdown impacting volumes in S.W. Sydney. Telehealth and GP shortages are impacting the division’s medical centre volumes. The low immigration numbers and site closures continue to impact Healius’ screening contract with BUPA. Although, volumes are expected to return as states open up, including a catch-up period for delayed diagnostic screening and elective surgery. We think Healius’ imaging business is well-placed to capitalise on the backlog with a strong hospital presence.
Healius’ Day Hospitals performance remains mixed, weighed by the impacts of COVID-19
Healius’ Day Hospitals division comprises Montserrat, Brookvale Day Hospital, Adora Fertility, and three colocated Healius Day Hospitals, which are now discontinuing operations. The Westside Private Hospital, Montserrat’s leading Day Hospital and the prototype for future short-stay facilities, delivered strong revenue growth, up 24% during the first half of the year compared to 1HFY21. However, overall top-line growth was flat due to the impacts caused by the pandemic. On a positive note, we believe that volumes are likely to return as states open up, including a catch-up period for delayed procedures. Furthermore, we are convinced that Montserrat is well-placed for this rebound.
Moreover, recent investments will support the identification and roll-out of growth initiatives, including a new day hospital and cancer centre at Murdoch in Perth, Western Australia. In addition to the Murdoch facility, Montserrat has a strong pipeline of both greenfield and M&A opportunities under consideration as it looks to capitalise in this growing sector. Also, the Brookvale Day Hospital continued to be profitable under the Montserrat management team.
Healius committed $1.4 million of Capital expenditure, with most of its spending on medical equipment and technology.
Healius has shown its ability to generate strong cash flow to support further growth
Ample operating cash flows
Healius achieved strong gross operating cash flows with 43.3% above the prior period. These cash flows were used to fund the significant growth in volumes in the business and specifically the high level of COVID-19 testing over the year-end, which drove an increase in receivables and consumables of $118.5 million over the period. We have also been pleased that the Group has achieved materially lower capital intensity following the divestment of HPC in the first half of FY21. As announced by the end of FY21, Healius is re-orienting its capital toward investment in digital, commercial and operational initiatives under its strategic SIP programme, including digital pathology. This will support the Company’s expansion in the long run.
In the period, Healius invested $42.8 million in maintenance and growth capital, $36 million for the final Montserrat earn-out and settlement and $12.6 million for acquiring Axis Radiology. Healius also paid $40 million in dividends and bought back shares totalling $100.8 million.
The Company’s balance sheet remains strong and conservatively geared, positioned to fund value-generating investments, meet its ongoing capital needs, and maintain a liquidity buffer.
Healius has pursued an aggressive strategy to realign its portfolio to deliver higher returns and growth from a strengthened balance sheet in recent years. Furthermore, the Company has entirely reviewed its capital management undertaken in 2020, which led to a $200 million share buy-back last year along with the return to dividend growth. We think that the recent strategic changes undertaken by Healius through its SIP programme will solidify the Company’s position as a leading healthcare service provider. With the return of dividend growth and a positive outlook, we recommend a “Buy” for HLS.