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Negative Industry Trends Impact Australian Clinical Labs

Small Caps | Aug 12 2022

This story features AUSTRALIAN CLINICAL LABS LIMITED, and other companies. For more info SHARE ANALYSIS: ACL

FY22 results for Australian Clinical Labs missed expectations and brokers await an uptick in non-covid testing.

-Australian Clinical Labs misses the consensus FY22 forecast
-Higher covid costs and a sluggish base business weigh
-Credit Suisse notes negative structural and behavioural trends
-Brokers assess the FY23 outlook


By Mark Woodruff

It will be difficult for ASX-listed pathology companies like Australian Clinical Labs ((ACL)) to outperform the market when industry earnings should more than halve over the next 12 months.

While holding this view on reduced covid testing going forward, Citi increases its FY23 earnings forecast for the company on higher near-term testing, following FY22 results, though retains its Sell rating and $4.50 price target. A lower margin contributed to a weaker-than-expected result.

FY22 profit was $184m (-5% below the consensus forecast) after adjusting for costs incurred in the Medlab Pathology acquisition last November, while revenue of $996m was 1% ahead of the consensus estimate.

Management maintained its long-term earnings (EBITDA) margin target of 27% (excluding covid), despite an inflationary environment, which Citi attributes to the highly accretive nature of the Medlab acquisition.

Credit Suisse assesses FY22 profit fell below the consensus expectation due to higher covid costs and impacts in the second half from a sluggish base business. The broker doesn’t envisage a quick fix for the impact of structural and behavioural changes on earnings, and downgrades its rating to Neutral from Outperform, while its target falls to $5.35 from $6.00.

Lower GP visits, higher rates of cancellations/absenteeism and staffing shortages are weighing on earnings, and management estimates an around -$70m “deficit” in non-covid testing, as volumes continue to trail behind pre-covid levels.

More positively, the company is net cash and announced a final dividend of 41cps, which was ahead of expectations held by Credit Suisse. As expected, no FY23 guidance was provided.

The average target price in the FNArena database, set by the two brokers previously mentioned, is $4.93, which suggests 4.3% upside to the prevailing Australian Clinical Labs’ share price.

Outside of the daily-update database, Goldman Sachs retains its Buy rating in the wake of FY22 results, though lowers its 12-month target price to $5.70 from $6.50.

The broker notes a sequential slowdown in business-as-usual and covid volumes over June, due to an early and pronounced flu/respiratory virus season. However, July and August are tracking more strongly and the end-of-FY22 slowdown should reverse during early-FY23.

The company remains the preferred exposure of Goldman Sachs to the pathology space, as the stock continues trade at a discount to Sonic Healthcare ((SHL)) and Healius ((HLS)).

The outlook

All brokers highlighted the difficulty of forecasting due to the uncertainty related to covid and non-covid revenue.

Citi expects a recovery in non-covid testing demand in FY23 and feels the fate of the new financial year will also be determined by covid testing revenue and management of operating costs, as well as synergies from the Medlab Pathology acquisition last November.

While Credit Suisse is positive on the medium-term story and believes Australian Clinical Labs can achieve its margin targets, base business volumes need to return for the market to gain confidence on this and management’s cost-out execution.

The more positive and Buy-rated Goldman Sachs notes that since the initial public offering in May 2021, the key debate with the stock has been the underlying (ex-Covid) profitability. To-date, it’s felt execution has been in-line or better than peers in an industry that continues to face a declining-revenue profile.

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