Healthcare Is Expensive, May Be Time For Profits

This story features ANSELL LIMITED. For more info SHARE ANALYSIS: ANN

-Healthcare sector expensive
-Need to view stocks individually
-Disparity with public health exposure
 

By Eva Brocklehurst

The healthcare sector has become expensive. In Deutsche Bank's view there is limited earnings risk for the larger healthcare companies in FY13, as strong demand from the ageing population and relatively stable funding underpin the attractive earnings outlook. CIMB has a Sell ticket on the larger capitalised stocks but emphasises the importance of looking at each individually rather than taking a broad sector view. In this broker's view, it may be time to take profits.

Credit Suisse finds a disparity between the large healthcare companies unimpeded by government competition, such as CSL ((CSL)), ResMed (( RMD)) and Cochlear ((COH)) and those subject to competition by the public health sector in Australia and overseas, such as Ramsay Health Care ((RHC)) Sonic Healthcare ((SHL)) and Primary Health Care ((PRY)). The broker notes, while the market is valuing most stocks on relatively similar levels, there is a large distinction in unleveraged return on equity (ROE). Credit Suisse explains this as RHC, SHL and PRY, being subject to fewer competitive pressures and with lower risk operations, can gear themselves to a higher level than their higher quality peers.

CIMB continues to view longer-term sector drivers favourably, as population growth, demographic shift in population age and innovation will underpin growth. However, near-term challenges remain, with slowing earnings growth and stretched valuations. There is also the potential for ructions if there is a change in the Australian government later in the year, given potential changes to private health insurance and recurring pathology funding negotiations. In the US there are weak utilisation rates and structural reimbursement changes. CIMB sees upside for PRY and downside for RHC and COH. The broker sees a defensive growth theme holding throughout the first half, with sentiment shifting toward capital appreciation and earnings momentum in the second half limiting strong sector gains.

Deutsche favours PRY, given its domestic focus, strong earnings growth profile and relatively attractive valuation metrics. Credit Suisse finds PRY should meet market expectations and has a Hold recommendation. In some ways the broker finds the stock overvalued but admits there's no near term catalyst that would result in a downgrade in rating. PRY is also a favourite of CIMB, hence a move to a Buy rating on improving profitability.

Meanwhile, SHL's funding pressures cloud its outlook, Deutschesuggests, and growth will likely slow in in the second half due to funding cuts across all major regions. Credit Suisse sees the stock as overvalued relative to ASX200 on price/earnings measures. On the FNArena database SHL has three Buy and five Hold ratings and its price target is comparatively narrow, from $13.45 to $14.55.

For CSL attractive growth is fully priced and, given the recent guidance upgrade, Deutsche has little doubt it will deliver a remarkable first half result. Credit Suisse notes CSL presents as materially undervalued proposition against the ASX200 and retains a Buy recommendation. CIMB also finds upside potential for this stock. On the FNArena database there are five Buy ratings, two Hold and one Sell (Citi). Last month Citi noted that good news was well priced in, before the potential has been realised. The target range is from $45.33 (CIMB) to $62 (Macquarie).

RHC has attractive growth and potential corporate activity reflected in a premium price, according to Deutsche, but the broker is confident the group can continue to deliver strong earnings growth for the foreseeable
future. Credit Suisse has a Hold on the stock while CIMB sees it, along with CSL, offering the most earnings certainty. Nevertheless, the broker believes it's probably time to take profits and has a Sell recommendation. Others on the FNArena database with a Sell recommendation include UBS and Citi.

RMD may surprise on the upside, according to Credit Suisse, in company with CSL and RHC, because of favourable industry and market dynamics. The broker finds a case for being long RHC and retains a Hold recommendation. Deutsche finds risk from competitive pressure and funding reform weighing on the outlook but continues to recommend holding the stock.

The one most at risk with a first half/second half skew in earnings is Ansell ((ANN)), according to CIMB. Deutsche also expects tough economic conditions will weigh on the first half and relying on the second half to achieve guidance may test investor confidence. ANN is a mixed bag on the FNArena database with three Buys, three Holds and one Sell.

Finally, COH is the wildcard stock in the sector, given a lack of earnings visibility, CIMB maintains. Deutsche says it looks overvalued and first half earnings will likely contract due to falling upgrade revenues and a smaller FX hedge gain. Credit Suisse sees some risks with COH but believes it is nearing undervalued compared with ASX200 stocks and notes it is cheaper than other healthcare stocks, bar CSL.
 

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