Stocks’ Details

Opthea Limited

Reported Positive Outcomes from its Phase 1b/2a Clinical Study: Opthea Limited (ASX: OPT) is a biologics drug development company focused on developing a novel therapy to treat highly prevalent and progressive retinal diseases. The company recently announced positive outcomes from its Phase 1b/2a clinical study of OPT-302 in patients with treatment refractory diabetic macular edema (DME). In a presentation provided at the University of Southern California Roski Eye Institute, Keck School of Medicine, the company informed that it observed greater gains in visual acuity following OPT-302 Combination Therapy in patients with a treatment history of prior Aflibercept. For the same patients, the company also observed a greater mean reduction in retinal thickness. The DME trial results are supporting further investigation in this indication in larger, randomized, controlled clinical trials.

Positive Phase 2a Trial Results of OPT-302: On 10 June 2020, the company had announced positive topline results of its Phase 2a trial evaluating safety and efficacy of OPT-302 administered with Eylea® (aflibercept) in treatment of refractory patients with persistent diabetic macula edema (DME). The results demonstrated that it achieved the primary endpoint of response with OPT-302 + Eylea®, with 52.8% of refractory DME patients gaining ≥ 5 letters of visual acuity at week 12 following OPT-302 combination therapy. These results show the potential of OPT-302 combination therapy for people living with diabetic macular edema, a leading cause of vision loss in working-age adults.

H1FY20 Result Highlights: For H1FY20, the company reported total revenue of $273,115, as compared to $480,338 in the previous corresponding period (pcp). For the period, the company incurred a loss of $7,620,018, down by 32% on the loss of $11,281,819 reported in pcp. At the end of H1FY20, the company had a cash balance of $75 million, compared to the cash balance of $40 million in pcp. 

H1FY20 Results (Source: Company Reports)

What to Expect: The company continues to undertake planning for its Phase 3 program in wet AMD, including regulatory engagement in the US and Europe. Further, the company is progressing with the manufacturing of OPT-302 for Phase 3 clinical trials. The company is going to host a Key Opinion Leader symposium on 6^th August 2020.

Key Risks: The main risks arising from the company’s financial assets and liabilities are interest rate risk, foreign currency risk, equity securities price risk and liquidity risk. The company’s investment in listed shares is exposed to equity securities price risk and their fair values are exposed to fluctuations as a result of changes in market prices.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (illustrative)

EV/Sales Multiple Based Relative 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 OPT has corrected by 24.65% on ASX. However, the stock has moved up by 20.35% in the last three months. The stock is currently trading above the average of its 52 weeks trading range. The company has a debt to equity ratio of 0.01x, lower than the industry median of 0.24x. We have valued the stock using EV/Sales multiple based illustrative relative valuation method and have arrived at a target price of low double digit-upside (in % terms). For the purpose, we have taken peers like Mayne Pharma Group Ltd (ASX: MYX), Virtus Health Ltd (ASX: VRT), Clinuvel Pharmaceuticals Ltd (ASX: CUV), etc. Considering the positive outcomes from the company’s Phase 1b/2a clinical study, decent trial results for OPT-302, and expected upside in the valuation, we give a “Hold” rating on the stock at the market price of $2.62, down by 3.676% on 27^th July 2020.

Estia Health Limited

Managing COVID-19 Outbreak: Estia Health Limited (ASX: EHE) is one of the largest residential aged care providers in Australia that provides highest standards of aged care services in an innovative, supportive and caring environment. Recently, the company notified that 13 residents at its Ardeer home have tested positive for COVID-19. In response to this, the company has implemented all the requirements of the Aged Care Quality and Safety Commission, in relation to the monitoring and management of the COVID-19 outbreak at its Heidelberg West and Ardeer homes in Melbourne. As per the requirements, the company is not admitting any new residents into the home until the Victorian Public Health Unit declares the home cleared of COVID-19. The company has appointed an independent adviser to assist with ensuring the health and wellbeing of residents.

Resilient Performance Amid COVID-19 Pandemic: Due to the easing of home and community restrictions arising from the COVID-19 pandemic, the occupancy in mature homes has improved to 92.7% as at 30 June 2020. Further, the movement in occupancy rates since the COVID-19 pandemic has not had a material impact to date on the company’s balance of RADs and bonds. The total RAD/bond liability of the company increased by $9.8 million from 31 December 2019 to be $836.3 million as at 30 June 2020, of which $99.9 million was represented by probate liabilities.

H1FY20 Highlights: During the first half of FY20, the company reported profit after tax of $14.3 million with 93.7% average occupancy.  The company’s disciplined management of costs allowed it to sustain its staffing investment in its homes to ensure delivery of the services and care that residents and families expect. During the period, the company saw net RAD inflows of $22.2 million. For the period, the company paid an interim dividend of 5.4 cents per share, representing approximately 100% of profit after tax.

H1FY20 Results (Source: Company Reports) 

What to Expect: The company’s goal continues to be a leader in the Australian residential aged care industry and a provider of choice for residents, employees, and investors. Due to the ongoing uncertainty of future sector funding and financing, exacerbated by the issues arising from the COVID-19 pandemic, the company expects to report a non-cash impairment charge of between $124 million and $148 million in its FY20 results. The company has scheduled to release its FY20 full year results on 18^th August 2020.

Key Risks: Any regulatory change or changes in Government policies in relation to existing legislation for the industry may have an adverse impact on the way the company promotes, manages and operates its homes, and its financial performance and the carrying value of its assets, including bed licences. Further, there is a risk that the company may experience a shortage of employees or upward wage pressure.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: Over the last six months, the stock of EHE has corrected by 38.04% on ASX and is inclined towards its 52 weeks low price of $0.905. As on 30^th June 2020, the company had net debt of $99.4 million. For H1FY20, the company’s gross margin stood at 91.8%, higher than the industry median of 57%. For the same period, the company’s net margin stood at 4.5%, higher than the industry median of 3.0%. The company had a debt to equity ratio of 0.25x in H1FY20, lower than the industry median of 0.38x. We have valued the stock using EV/EBITDA multiple based illustrative relative valuation method and have arrived at a target price of low double digit-upside (in % terms). For the purpose, we have taken peers like Regis Healthcare Ltd (ASX: REG), Japara Healthcare Ltd (ASX: JHC), Virtus Health Ltd (ASX: VRT), etc. Considering the company’s decent H1FY20 results, its resilient performance amid COVID-19 pandemic, decent profitability margins, and current trading levels, we give a “Speculative Buy” recommendation on the stock at the current market price of $1.46, down by 7.595% on 27^th July 2020.

Healius Limited

FY20 Results Update: Healius Limited (ASX: HLS) is one of Australia's leading healthcare companies with an expansive network of multi-disciplinary medical centres, pathology laboratories and diagnostic imaging centres. In a trading update provided on 27^th July 2020, the company announced that it expects its FY20 underlying EBIT to be in between $102-104 million and underlying NPAT of approximately $54-56 million from continuing operations. The results are underpinned by the Pathology division trading in combination with a rapid response by the company to reduce costs. It is worth noting that the company is currently undertaking up to 16,000 COVID-19 tests per day, including undertaking nearly 50% of private COVID-19 testing in Victoria. In the Pathology division, the company’s total volumes are running ahead of the prior comparable period and are expected to continue at strong levels in the near term. In the Imaging division, the company has observed some improvement in its trading volume since May, mainly due to the reopening of the economy and, particularly, due to resumption of elective surgery.

FY20 Unaudited Results (Source: Company Reports)

Sale of Healius Primary Care: The company has recently entered into a binding agreement to sell the Healius Primary Care business to funds managed by BGH Capital. Following this sale, the company is expected to have balance sheet flexibility and a good level of available liquidity together with a significantly reduced requirement for ‘business as usual’ capital expenditure from its continuing operations.  In its FY20 results, the company expects to report an after-tax loss on discontinued operations in the order of $110-$120 million relating to Healius Primary Care.

What to Expect: With a growing day hospitals business, the company currently seems to be well-placed to leverage its established market positions and scalable businesses with a clear pathway to growth. The company is transitioning the business to the new operating model reflecting the simplified portfolio following the Healius Primary Care sale. Its overhead costs are expected to reduce in FY21 as well as FY22. The company expects to release its FY20 full-year results on 21^st August 2020.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

EV/EBITDA Multiple Based Relative 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 three months, the stock of HLS has increased by 32.08% on ASX and is trading close to its 52 weeks high price of $3.315. As on 30 June 2020, the company had a net debt of around $670 million and bank gearing ratio of 2.7x with good cash conversion and strong liquidity. For H1FY20, the company’s gross margin stood at 88.8%, higher than the industry median of 57%. For the same period, the company’s net margin stood at 7%, higher than the industry median of 3%. We have valued the stock using EV/EBITDA multiple based illustrative relative valuation method and have arrived at a target price of high single-digit upside (in % terms). For the purpose, we have taken peers like Sonic Healthcare Ltd (ASX: SHL), Estia Health Ltd (ASX: EHE), Sigma Healthcare Ltd (ASX: SIG), etc. Considering the company’s expected FY20 results, its robust balance sheet with decent liquidity position, and recent decision to sell Healius Primary Care, we give a “Hold” recommendation on the stock at the current market price of $3.25, up by 2.524% on 27^th  July 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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