I. Sector landscape and outlook
Healthcare sector has always been under the investors’ radar. Healthcare stocks are considered non-cyclical and defensive in nature because irrespective of the economic cycle, health will always remain a priority for individuals. Thus, the demand for healthcare products and services is likely to remain unaffected irrespective of the market conditions. Investors turn their focus to the healthcare stocks when the economy is underperforming, and the outlook remains challenging. During the economic downturn, the healthcare sector provides a degree of comfort to the investors because of its defensive and non-cyclical characteristics. When the markets are struggling, investments in healthcare stocks limit or even mitigate a part of the losses an investor makes.
Australian healthcare index has consistently outperformed the ASX 200
Over the last ten years, healthcare index in Australia has outperformed the ASX 200 Index despite the recent correction.
Fig 1: 10 Year Performance (ASX Healthcare index vs ASX 200)
Source: Refinitiv, Thomson Reuters
Australian Healthcare System
The healthcare system of the country is one of the most comprehensive in the world. The system offers a range of services from general and preventative health, through to treating more complex conditions, that may need a specialist or hospital care. The healthcare system is divided into two part: the public health system and the private health system.
The public system includes community-based services, public hospitals, and affiliated health organisations primarily governed and owned by the governments. The Australian public accesses care within the public health system for free or at a lower cost through Medicare (funded by tax).
The private system includes health service providers that are owned and managed privately, which includes private hospitals, specialist medical and allied health, and pharmacies.
The services of the public system are funded by local, state and federal governments, while the services of the private system are funded by a combination of government and private entities, including, private health insurance premiums, people paying directly for private treatment, Government incentives on private health insurance and other government and private funding.
Figure 2: Components of Healthcare Sector
Source: Kalkine
Role of the Government
The government is responsible for the development of national health policy, administering Medicare (including funding GP and private medical services), providing funds to states and territories for public hospital services. The government is also responsible for providing oversight of Primary Health Networks, funding medicines through the Pharmaceutical Benefits Scheme, regulating private health insurance, funding community-controlled Indigenous primary healthcare, organising health services for veterans and funding health and medical research.
Government Spending on Healthcare
The government spending is estimated to be at ~$81.8 billion on health in 2019-20, which is 16.3% of the government’s total expenditure. Medical services and benefits, comprised primarily of Medicare and Private Health Insurance Rebate expenses, will account for $33.7 billion, reflecting 41.2% of total health funding.
Fig 3: Government Spending on Health
Source: Australian Government, Budget strategy and outlook
Spending on health is expected to increase by 2.0% in real terms (accounting for inflation) from 2019–20 to 2022–23. The largest drivers of this increase would be growth in assistance to the states for public hospitals, and medical services and benefits.
Spending on medical benefits is expected to increase by 9.8% from 2019–20 to 2022–23. This is largely due to ongoing growth in the use of medical services and the use of high-value items on the Medicare Benefits Schedule. Expenses for private health insurance are expected to increase by 0.7% in real terms over the period 2019–20 to 2022–23.
Key Trends in the Healthcare Sector
Soaring demand for convenient healthcare diagnosis and treatment: The increasing demand for convenient healthcare diagnosis and treatment has led to a subsequent rise in need of home healthcare. Increasing home healthcare expenditure has contributed to the growth of the market in recent years. The increasing geriatric population has led to an increase in demand for home healthcare services.
TeleHealth on the rise: TeleHealth, as an idea, is interchangeable with telemedicine with respect to utility and refers to the collection and exchange of information electronically among doctors, allied health and patients in both synchronous and asynchronous modes. The segment is playing a crucial part in the battle against the COVID-19 pandemic. Telemedicine helps medical professionals for diagnosing, evaluating, and treating patients in remote locations through the use of telecommunications technology. In late March 2020, the government announces the expansion of telehealth services across the country. The government of Australia has been consulting extensively with the Australia Medical Association (AMA), Royal Australian College of General Practitioners (RACGP), ACCRM, RDAA, and other crucial peak bodies and associates of the medical and health profession in Australia, to ensure Medicare is responsive to the challenges during COVID-19 pandemic.
Increasing focus on mental health: Besides hitting the economic activity, COVID-19 pandemic is also taking a heavy toll on people’s mental health across the world, as they are getting increasingly concerned about their health, finances, and uncertainty about future possibilities. Mental health and suicide prevention are top priorities of the government as one in four Australian are affected by a mental health illness each year. The government would be investing $24.2 million to lessen wait times - fast-tracking access to mental health services for young people in the age group 12 to 25 years seeking headspace appointments.
Ageing Population to drive the demand for healthcare services: According to the Australian Bureau of Statistics (ABS), the number of Australians aged 65 years or above were ~3.9 million, or 15.9% of the total population in 2019. This was an increase from 15.1% in 2015 and 14.3% in 2012. It is estimated that by 2031, 19% of Australia’s population will be aged 65 years or above. With a continuous rise in the aged population, there will be an increase in the number of people needing medical care and assistance.
IVD devices and Personal Protective Equipment have emerged as growth catalysts for the Healthcare Equipment Industry: In Vitro Diagnostic (IVD) medical devices have emerged as solid catalysts for the industry across the world. IVD devices are efficient in finding diseases or other health issues and also widely used to monitor a person’s health conditions, treatment and prevention of diseases. Among the healthcare equipment market, this particular segment commands a significant share of ~ 13% globally. The IVD devices market is categorised into reagents, instruments and software & services and out of these three sub-segments, reagents devices hold the highest market share and software & services is estimated to grow at the fastest rate in the next five years. Further, the outbreak of COVID-19 has spurted the demand for Personal Protective Equipment. The current global inventory of protective equipment is inadequate, primarily for masks and respirators; the supply of gowns and goggles is soon expected to be insufficient to cater to the demand glut.
Government’s healthcare spending on the rise: According to the Australian government’s budget review for 2019-2020, healthcare spending is predicted to grow by ~2.0% (inflation-adjusted) during the period 2019-20 – 2022-23. Public hospitals and medical services are likely to be the biggest beneficiaries of the funding. The government made a $1.1 billion commitment to strengthen primary healthcare. Under the commitment, $448.5 million is likely to spend for a new chronic disease care funding model over three years from 2020–21. Further, $308.9 million is likely to be spent for improved access to diagnostic imaging services over five years from 2018-19. The government is likely to invest $1.3 billion as part of the Community Health and Hospitals Program over seven years from 2018-19. The program covers four priority areas: hospital infrastructure; drug and alcohol treatment; preventive health, primary care and chronic disease management; and mental health.
Risk
The Australian healthcare industry is exposed to a variety of risks including regulatory changes and regulatory scrutiny, disruptive business models, innovations triggered by emerging technologies, changes in the geopolitical landscape, shifting customer preferences and demographics.
Outlook
The healthcare industry is an ever-growing ecosystem that encompasses many specialities and subspecialties. COVID-19 pandemic led demand spurt for healthcare facilities and equipment, and the trend is expected to continue in the near-term. The pandemic also has paved ways for some innovations and telehealth, or telemedicine is one of them. We believe telehealth to gain ground in the near to medium term as people are expected to practice social distancing norms for some time. Further, Home Healthcare Market is likely to expand considerably in the coming years, stoked by increasing geriatric population.
II. Investment theme and stocks under discussion (VRT, MVP, EHE, RHC and RSH)
After understanding the sector, let us now look at five companies listed on the ASX. The price potential of the companies under discussion has been analysed based on ‘EV/Sales’ method.
- ASX: VRT (VIRTUS HEALTH LIMITED)
(Recommendation: Buy, Potential Upside: Low Double Digit, Mcap: A$ 274.1 Million)
Virtus Health Limited is involved in providing assisted reproductive services, fertility care services and related specialised diagnostic and day hospital services.
Valuation
Our illustrative valuation model suggests that the stock has a potential upside of ~21% on 20 August 2020 closing price. We have considered Monash IVF Group Ltd (ASX: MVF), Integral Diagnostics Ltd (ASX: IDX), and Japara Healthcare Ltd (ASX: JHC) etc., as a peer group for the comparison purpose.
- ASX: MVP (MEDICAL DEVELOPMENTS INTERNATIONAL LIMITED)
(Recommendation: Buy, Potential Upside: Low Double Digit, Mcap: A$ 434.4 Million)
Medical Developments International Limited is in the business of pharmaceutical drug, medical and veterinary equipment.
Valuation
Our illustrative valuation model suggests that the stock has a potential upside of ~22% on 20 August 2020 closing price. We have considered Polynovo Ltd (ASX: PNV), Volpara Health Technologies Ltd (ASX: VHT), and PainChek Ltd (ASX: PCK) etc., as a peer group for the comparison purpose.
- ASX: EHE (ESTIA HEALTH LIMITED)
(Recommendation: Speculative Buy, Potential Upside: Low Double Digit, Mcap: A$ 389.3 Million)
Estia Health Limited is one of the largest residential aged care providers in Australia that offers the highest standards of aged care services in an innovative, supportive, and caring environment.
Valuation
Our illustrative valuation model suggests that the stock has a potential upside of ~19% on 20 August 2020 closing price. We have considered Regis Healthcare Ltd (ASX: REG), Japara Healthcare Ltd (ASX: JHC), and Virtus Health Ltd (ASX: VRT) etc., as a peer group for the comparison purpose.
- ASX: RHC (RAMSAY HEALTH CARE LIMITED)
(Recommendation: Hold, Potential Upside: High Single Digit, Mcap: A$ 15.5 Billion)
Ramsay Health Care Limited is global hospital group operating in around ~500 locations in Australia, the United Kingdom, France, Sweden, Norway, Denmark, Germany, Indonesia, Malaysia, Hong Kong, and Italy.
Valuation
Our illustrative valuation model suggests that the stock has a potential upside of ~8% on 20 August 2020 closing price. We have considered Sonic Healthcare Ltd (ASX: SHL), Ansell Ltd (ASX: ANN), and Sigma Healthcare Ltd (ASX: SIG) etc., as a peer group for the comparison purpose.
- ASX: RSH (RESPIRI LIMITED)
(Recommendation: Watch, Potential Upside: NA, Mcap: A$ 101.2 Million)
Respiri is an e-Health SaaS company supporting respiratory health management. Its world-first technology detects wheeze, a typical symptom of asthma, COPD and respiratory disease to provide an objective measure of airway limitation.
Valuation
The company has recorded solid price performance over the past one year, as its shares are up by 57% on a YoY basis, surged ~62% on a YTD basis, leapt up 154% in the past three months. Also, its shares have significantly outperformed the benchmark index and sector peers in the same time periods. This reflects the strong relative price strength in the stock. Further, at the last traded price, its shares traded approximately 750% above its 200-day SMAs, a strong bullish trend. However, 14-day Relative Strength Index hovering near the overbought zone, which indicates some correction could take place in the near term. Also, the MACD line is falling and hovering below the 9-day SMA signal line, which indicates weakness in the current trend. Hence, we recommend a ‘Watch’ stance on the stock at the current price of $0.15.
Note: All the recommendations and the calculations are based on the closing price of 20 August 2020. The financial information has been retrieved from the respective company’s website and Refinitiv (Thomson Reuters).
Disclaimer
The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as personalised advice.