Company Overview: Healius Ltd, formerly Primary Health Care Limited is a medical center operator. The Company also operates as a provider of diagnostic imaging services; a provider of pathology services, and a provider of health technology. It provides a range of services and facilities to healthcare practitioners, and its medical center operations include the provision of day surgery and in vitro fertilization services by healthcare practitioners. Its segments include Medical Centres, Pathology, Imaging, Health Technology and Other. The Medical Centres division provides services and facilities to general practitioners, specialists and other healthcare providers, and includes Transport Health. The Pathology division provides pathology services. The Imaging division provides imaging and scanning services from standalone imaging sites and from within the consolidated entity's medical centers. The Health Technology division develops, sells and supports health-related software products.
 

HLS Details
 
Positive Momentum in all Three Divisions: Healius Limited (ASX: HLS) is engaged in activities such as pathology services, medical centres and diagnostic imaging services with three evolving businesses- dental, IVF and day hospitals. The company provides diagnostic services to customers and their consulting specialists. It also enables a wide range of private healthcare professionals to provide patient care in collaboration with Healius’ nurses and assistance staff. For the year ended 30 June 2019, the company reported revenue of $1,804.5 million, up around 5.9% year over year. Underlying EBIT for the year stood at $167.3 million, up around 4.5% year over year. EBIT was impacted by favourable results in all three divisions. In FY19, underlying NPAT came in at $93.2 million as compared to $87.5 million reported in FY18. Reported NPAT for the period was $55.9 million, up from $4.1 million in FY18. The company declared a final dividend of 3.4 cents per share in FY19. 
 
For FY20, the company anticipates underlying net profit after tax to be higher than FY19, subject to any unforeseen market conditions coupled with any changes from the execution of AASB 16 on leases. The company further expects long-term market growth backed by improvements in healthcare technology and cancer endurance rates, favourable population trend and increasing patient expectations.
 
The company witnessed a compound annual growth rate of 11.5% in revenue in the time span of FY15-FY19. Over the above stated period, the company reported continuous increase in its largest business, Pathology, along with significant decrease in net debt, as depicted in the figure below. Growth strengthened as the company is witnessing positive movement across all divisions which are in line with its strategy to renew the Medical Centres and invest in leading-edge infrastructure and emerging businesses.
 

Reduction in Net Debt (Source: Company Reports)
 
FY19 Performance Driven by Robust Performance in all Three Segments: During the period, revenue soared up 5.9% to $1,804.5 million. Underlying EBITDA in FY19 came in at $236 million, as compared to $228 million reported in FY18. EBIT for the period was $167.3 million, up 4.5% year over year. EBIT was positively impacted by decent growth in Pathology, Medical Centres and Imaging businesses. Underlying NPAT came in at $93.2 million, up from $87.5 million reported in the year-ago period. Reported NPAT for the period stood at $55.9 million, as compared to $4.1 million in FY18. Earnings per share stood at 9.2 cents per share as compared to 0.8 cents per share reported in FY18.  In FY19, the company declared a final dividend at 3.4 cents per share, with total dividend for the year amounting to 7.2 cents per share.
 

FY19 Results (Source: Company Reports)
 
Pathology Division Key Catalyst: Pathology is the largest division of Healius Limitedcontaining 280 expert pathologists, 2,300 scientists and assistants, and 3,800 collectors.  Revenue for the segment increased by 3.5% and came in at $1,128.3 million in FY19. Underlying EBIT rebounded sharply in the second half, soaring 46% as compared to the first half results. 
 
Medical Centres Highlights: Revenue from the division increased by 13% to $327.4 million in FY19, attributed to the acquisition of Montserrat and revenue growth in Health & Co.EBIT stood at $37.6 million, up 19% on pcp. In FY19, the company recorded 259 General Practitioners (GPs), up 63% from FY18. At the end of FY19, the company had around 1,164 GPs.
 
Imaging Division highlights: In FY19, revenue from the imaging division stood at $391.3 million, up 7.9% year over year.  The increase can primarily be attributed to growth from existing and new sites and continuous potency in MRI. EBIT in FY19 came in at $38.7 million, up 14.5%, the third consecutive year of double-digit increases.
 
Details of Emerging Businesses: Dental revenue in FY19 stood at $35.2 million, up 4.8% on FY18. EBIT increased to $5.7 million during the period. The division is meeting the increasing demand in the community by unveiling an innovative fixed-price general dentistry.
 

Divisional Highlights (Source: Company Reports)
 
Balance Sheet Position: At the end of the year, the company reported a cash balance of $119.7 million. The company’s net debt at the end of the year came in at $678.2 million, down from $776.8 million as at 30 June 2018. Overall, the company has depicted significant leverage improvement since FY15, on account of capital raise in 1HFY19, free cash flow generation and capital recycling program.
 
Cash Flow Position: Operating cash inflow in FY19 came in at $127.6 million as compared to $202.2 million in FY18. Net cash outflow from investing activities amounted to $217.5 million in FY19 as compared to $132.2 million in FY18. Net cash provided by financing activities stood at $125.7 million in FY19 as compared to an outflow of $81.5 million in the previous year. Maintenance capital expenditure for the period came in $51.6 million. Whereas, growth capital expenditure stood at $176.4 million, representing payments made for Montserrat Day Hospitals acquisition, strategic projects along with platforms in Pathology and Imaging.
 

Cash Flow Details (Source: Company Reports)

In FY19, the company unveiled the ‘Healius’ brand – which supported record GP recruitment. In the second half of FY19, the company commenced organizational redesign. In FY19, the company achieved the productivity program targets in the pathology division and progressed on laboratory platforms. Coming to medical centres, the company witnessed two successive halves of rising returns. Further, the company upgraded 15 sites as per its plan and expanded customers’ offerings with SwiftQ Immediate Care, Skin2 and Logic Health. The Imaging division witnessed three consecutive years of double-digit EBIT growth. The company’s Imaging Core Application Refresh (iCAR) roll-out continues to grow rapidly with more than 70 live sites.  With the above scenario in place, the company is confident about retaining its existing customer base and expects to maintain a dominant growth momentum in FY20.
 
Recent Update: Shareholding Update: On 13^th December 2019, the company issued an announcement stating that Harris Associates L.P along with its related bodies corporate, became a substantial holder of the company with a voting power of 5.03%.
 
Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 44.07% of the total shareholding. Jangho Group Co Ltd is the entity holding maximum shares in the company at 15.91%. Dimensional Fund Advisors, L.P. is the second largest shareholder, with a holding of 5.5%.
 

Top Ten Shareholders (Source: Thomson Reuters)

Key Metrics:  In FY19, the company had a gross margin of 88.6%, which was higher than the industry margins of 37.2%. Gross margins and EBITDA margin of 88.6% and 6.5%, were higher than the margins of FY18, representing decent fundamentals. Debt-to-equity ratio for the year stood at a decent level of 0.39x, reflecting the funds raised for expansion and upgradation of existing centres, which will further drive growth in the business.
 
 
Key Metrics (Source: Thomson Reuters) 

Outlook: The company is taking necessary measures to progress on laboratory platforms in the coming years, which will ultimately impact the company’s long-term growth and profit margins. For FY20, the company expects underlying net profit after tax to be in the range of $94 million - $102 million, before any changes from the application of AASB 16 on leases and subject to any unanticipated situations. At the top end of the guidance range, growth on the previous year will be ~9.4%. Moreover, we presume that the extension of the strong operating conditions in Pathology is likely to be the most vital factor in the positive delivery of the prediction.  The company further believes that long-term market growth will be supported by advancements in healthcare technology and cancer endurance rates in Australia, boosted by positive trends in population and ageing and increasing per capita wealth. Furthermore, the strategic initiatives and structural redesign undertaken by the company, intend to provide a business distinguished by clinical quality, customer-friendly access, and cost- productivity. This, in turn, is expected to support customer well-being along with the prevention of severe illness with initial intervention. Additionally, the company has a strong FY20 pipeline with M&A and BaU roll-ins in the medical centre segment. The business will propose better skills at centres under its new operating model.
 

Key accomplishments with a Strong Run-Rate into FY2020 (Source: Company reports)
 

Key Valuation Metrics (Source: Thomson Reuters)
Valuation Methodologies
 
Method 1:Price to Earnings Multiple Approach

Price to Earnings Based Valuation (Source: Thomson Reuters)
 
Method 2: EV/EBITDA Multiple Approach

EV/EBITDA Based Valuation (Source: Thomson Reuters)
 
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
 
Stock Recommendation: The stock of the company generated positive returns of ~7.8% over a period of one year. In FY19, the company delivered a stellar result, driven by positive contributions from all three divisions and expects to thrive further on the back of population trends and increasing patient expectations. In FY19, the company achieved the productivity program targets in the pathology division and progressed on laboratory platforms. To drive further growth, the company will propose better skills at centres under its new operating model in the coming years, which will eventually contribute to the long-term growth of the company.  From the analysis standpoint, the company has recorded revenue CAGR of 11.5% over the last four years. 
 
Considering the above factors, we have valued the stock using two relative valuation methods, i.e., Price to Earnings and EV/EBITDA multiples, and for the purpose, we have taken the peer group Sonic Healthcare Ltd (ASX: SHL), Ramsay Health Care Ltd (ASX: RHC) and Ansell Ltd (ASX: ANN). As a result, we have arrived at a target price depicting the upside of lower double-digit (in % terms). Hence, we recommend a “Buy” rating on the stock at the current market price of $2.810, up 1.079% on 08 January 2020.
 
 
HLS Daily Technical Chart (Source: Thomson Reuters)

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