Company Overview: Healius Limited (ASX: HLS) has its three main businesses in Pathology, Medical Centres, and Imaging. The company is mainly engaged in providing medical, para-medical, and related services. It provides a broad 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. The company is a leading market network company in Australia with ~2,574 total sites, 95 medical centres and day hospitals, 2,334 pathology centres, along with 145 imaging centres.
 

HLS Details

Cost Savings Initiatives & Strong Performance in all Three Business Segments are Key Catalysts: Healius Limited (ASX: HLS) is engaged in providing diagnostic and pathology services to consumers and their consulting practitioners, along with enabling a broad range of individual healthcare professionals to provide patient care in association with Healius’ nurses and support staff. The company has three main businesses called Pathology, Medical Centres, and Imaging. The company is a leading market network company in Australia with ~2,574 total sites, 95 medical centres and day hospitals, 2,334 pathology centres, along with 145 imaging centres.

In FY19, total underlying revenue increased by 5.9% and came in at $1,804.5 million. The company reported underlying EBITDA of $236 million, up from $228 million reported in the year-ago period. The increase can primarily be attributed to decent growth in Pathology, Medical Centres, and Imaging businesses. 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.
 
Going forward, the company is planning to divest a part or all the Medical Centres businesses to focus on several growth initiatives in the Diagnostic divisions. The company remains on track to refresh and renew its Medical Centres and invest in leading-edge infrastructure technology and emerging businesses.  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.
 
Coning to the last four-years performance covering a time span of FY15 to FY19, the company witnessed a top-line CAGR of ~3.1%. Over the above stated period, the company witnessed a constant rise in its largest business, Pathology, along with significant decrease in net debt. Moreover, in the pathology division, the company witnessed a CAGR of 11% in EBIT in the past 3 halves (1H17-1H20). The company aims to generate significant cash from operations and maintain a healthy balance sheet.
 

Reduction in Net Debt (Source: Company Reports)
 

Pathology EBIT (Source: Company Reports)
 
1HFY20 Key Highlights for the Period Ended 31 December 2019: During the period, revenue rose by 7.5% and came in at $945.1 million. In all its main businesses, the company witnessed decent revenue growth. The company’s robust performance reflects its efficiencies derived out of organisational redesign and cost savings initiatives. The company reported an underlying EBITDA of $113 million, up from $108.4 million reported in the year-ago period. EBIT for the period stood at $75.7 million, up 4% from $72.7 million reported in the year-ago period. The increase can primarily be attributed to decent growth in Pathology and Imaging businesses, which more than offset the decline in Medical Centres business. Underlying NPAT for the period stood at $42.1 million, as compared to $39.1 million reported in the year-ago period. In 1HFY20, the company declared an interim dividend of 2.6 cents per share (fully franked).
 

1HFY20 Key Financial Highlights (Source: Company Reports)
 
Segmental Highlights: Revenue from the Pathology segment came in at $583 million, an increase of 5.7% from $551.5 million reported in 1HFY19. Underlying EBIT rallied in the second half of FY20, increasing 10% year over year.  Revenue from the Medical Centresdivision stood at $183.2 million, an increase of ~18% year over year, on the back of Montserrat acquisition and revenue growth in Health & Co. The company remained on track to focus on continued recruitment of quality General Practitioners, better service, and engagement, along with higher investment in frontline staff. In 1HFY20, revenue from the imaging division increased ~5% year over year and came in at $201.8 million. EBIT from the imaging division stood at $21.3 million, an increase of 16% year over year. The company’s cost control initiatives, contract wins and select M&As were key positives.
 
Balance Sheet Position: At the end of the period, the company reported a cash balance of $121.3 million. The company’s net debt at the end of the period came in at $746.6 million, up from $678.2 million as at 30 June 2019. The company witnessed a significant improvement in leverage since FY15 from the capital recycling program, free cash flow generation and capital raise in FY19. Furthermore, continuous plans to balance challenging demands and higher strategic investment are key positives. Gearing ratio for 1HFY20 stood at 26.4%.
 

Debt Details (Source: Company Reports)
 
Cash Flow Highlights: At the end of 31 December 2019, the company’s operating cash inflow stood at $129.3 million as compared to $55.6 million at the end of 31 December 2019. Net cash outflow from investing activities came in at $86 million, as compared to net cash outflow of $145.1 million in the year-ago period. Net cash used in financing activities amounted to $41.8 million as compared to an inflow of $110.6 million in the previous year. Maintenance capital expenditure for the period came in $34.5 million. Whereas, growth capex stood at $51.5 million, representing payments made for Montserrat Day Hospitals acquisition, strategic projects, along with platforms in Pathology and Imaging.
 

Cash Flow Details (Source: Company Reports)

COVID-19 Update on HLS Business: Due to the Covid-19 pandemic, the company is taking necessary measures to reduce cost and maintaining liquidity. As per a business update in late March, the company’s performance was in line with expectations. Recently, the company witnessed a strong increase in demand in COVID-19 tests per day at its laboratories. Due to significant deferral of non-COVID-19 testing and elective services, the company has witnessed varying rates of volume decline in its businesses. HLS is closely working with Federal and State Governments to ensure its essential healthcare services are readily available in the community. The company has recently decided to defer its FY20 interim dividend. Through the combination of trading, cost reductions, cash conservation and Government funding, the company is expecting to remain within its banking covenants in FY20 and is targeting to maintain its bank gearing ratio below 3.0x.
 
Key Developments: The company witnessed increasing positive momentum throughout 1HFY20. The company unveiled supporting record GP recruitment, attained the productivity program targets in the pathology division and advanced on laboratory platforms. The company also initiated an organizational revamp to improve its productivity and better serve its patients. With the above scenario in place, the company is confident about retaining its existing customer base and expects to maintain a dominant growth momentum, going forward.
 
Recent Update: On 29 April 2020, the company entered a partnership deal with the Minderoo Foundation to quickly increase COVID-19 testing via Minderoo’s national Safety Through Accelerated Testing (STAT) program. The company plans to increase its own capacity for COVID-19 testing as part of a 3-fold rise in total daily testing capability across the country.
 
Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 45.41% of the total shareholding. 
 

Top Ten Shareholders (Source: Refinitiv, Thomson Reuters)

Key Metrics: In 1HFY20, the company reported gross margin and EBITDA margin of 88.8% and 23.1%, which was higher than the industry median of 57% and 10.6%, respectively. 

 
Key Metrics (Source: Refinitiv, Thomson Reuters) 

Outlook: The company’s strong operating conditions in Pathology is likely to be the most vital factor in the positive delivery of the prediction. Also, the strategic proposals and structural changes undertaken by the company are expected to provide a business differentiated by clinical quality, customer-friendly access, and cost-effectiveness. The company remains on track to deliver significant value to its shareholders through continuous payments of dividends, and investment in new and latest technologies.


Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology- Price to Cash Flow Multiple Approach (Illustrative) 

Price to Cash Flow Based Valuation (Source: Refinitiv, Thomson Reuters)
 
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months
 
Stock Recommendation: In the last six months, the stock of HLS has declined by 22.19% on ASX and is trading below the average of its 52-week low and high of $1.925 and $3.315, respectively. HLS delivered a stellar result, driven by positive contributions from all three divisions. HLS possessed a strong balance sheet with decent leverage within covenants. The company is focused on managing debt levels for balancing an optimal gearing ratio with capital needs and dividends. It expects to capitalise on the back of population trends and increasing patient expectations. Considering the above factors, we have valued the stock using Price to Cash flow multiple based illustrative relative valuation method and have arrived at a target price offering an upside of lower double-digit (in % terms). Hence, we recommend a “Buy” rating on the stock at the current market price of $2.44, up 0.826% on 27 May 2020.
 

HLS Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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