Healius Offers Digital Carrot, Base Remains Soft

This story features HEALIUS LIMITED, and other companies. For more info SHARE ANALYSIS: HLS

Recovery in the core business remains important in the near-term for Healius, as benefits from covid testing look likely to soften in the remainder of the year, but longer-term digitisation remains a focus for the company.

-Healius continues to chase digital optimisation, but lags behind competitors
-In the nearer term, covid testing remains an important contributor
-Base business recovery remains slow

By Danielle Austin

Digital integration remains top of the agenda for Healius ((HLS)), and a focus of the company’s recent Strategy Day. While the integration of artificial intelligence into diagnostics was a feature of the company’s update, hoped to support Healius in delivering superior clinical insights and operational efficiencies moving forward, the company remains more than two years away from realising the full benefits of its currently under-implemented Lab Information System.

The Lab Integration System aims to transition Healius’ legacy systems to a unified platform, offering standardised workflow across all labs nationally, and is considered a key step as the company continues on its path to becoming a digitally-enhanced diagnostic operator.

However, as market experts noted, despite raising $100m in FY18 to fund the system, and a current spend to date of -$25m, roll out to the lab network is just getting started and Healius trails behind competitor Australian Clinical Labs ((ACL)), which has already rolled out its own unified network.

Healius’ Lab Information System is set to cost the company a total -$85-90m, and to deliver benefits of $15-20m per annum.

Base business and covid testing remain crucial near-term

While digitalisation remains important to Healius’ longer-term prospects, in the nearer-term market analysts are looking for further recovery in the company’s core business to balance the likely decline of benefits from covid testing, with both important to the company’s near-term outlook.

Despite revenue improving across all divisions, a weaker environment for the company’s base business continues to impact on performance. While covid volumes are currently offsetting soft base business, durability is not guaranteed with the market largely anticipating testing to decline in the coming half.

In the first half of the financial year the company reported 56% revenue growth on the previous comparable period, strongly linked to ongoing covid testing with core revenue up only 3%.

The slower than anticipated recovery of the core business has also impacted on benefits received from Sustainable Improvement Program (SIP) initiatives, with labour constraints and soft volumes delaying implementation, although the company did reiterate it remains on track to achieve $67m in earnings from the program by the end of FY23.

The Brokers

With six of FNArena’s core brokers updating on Healius, three are Buy rated or equivalent and three are Hold rated, with a collective average target price of $4.82. While Healius’ recovery remains on-track with the wider industry, the market is looking to see further improvement in the core business with the longevity of covid benefits uncertain.

With an Outperform rating and a target price of $5.20, Macquarie holds the highest target price for Healius of the brokers in our coverage, noting while trading remains below pre-covid levels it is tracking in line with the broker’s expectations. The Macquarie analysts see scope for the base business to improve heading into the next financial year, and expect the Sustainable Improvement Program to further support volume recovery and margin improvement moving forward.

Credit Suisse remains Neutral rated with a target price of $4.65, and anticipates net profit will decline in the second half, forecasting $107m from $246m in the first half but expecting covid testing will continue to contribute 20%.

The broker anticipates the company will not only benefit from addressing a backlog of routine services, it also expects demand will catch-up to longer-term trends including population growth, an ageing population, increasing levels of disease and improved survival rates.

At the other end of the spectrum, Morgan Stanley is Equal Weight rated and reduced its target price to $4.40 from $4.45 following Healius’ update. Morgan Stanley experts note the base business supports the current valuation, while durability of PCR testing will determine potential upside, but it is the decline in ongoing PCR testing that drove the broker to reduce its target.

The broker anticipates covid benefits will start to wane in the second half, and predicts Healius will report a 34% earnings contribution from covid testing in the current financial year but only a 12% earnings contribution in the following year. Further, while the analysts highlighted industry diagnostic imaging levels remain below expectations, they see better value elsewhere in the sector.

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