Healius is looking to new sources of strategic growth as well as dealing with prior underinvestment in infrastructure

Business Strategy & Outlook

In 2018, the former Primary Healthcare rebranded itself as Healius to signify the strategic turnaround underway. Healius is looking to new sources of strategic growth as well as dealing with prior underinvestment in infrastructure. There is much to fix in the business and it can be anticipated to take a few years before significant margin improvements are made in the base pathology and imaging businesses. Healius selling its medical centers to focus on redirecting capital toward infrastructure upgrades and higher-margin Montserrat day hospitals is viewed as a positive strategic step. Improvement in systems is key to improving efficiency. Pathology is an increasingly technologically driven service and the company intends to invest in a new laboratory information system, automation, and digitization through to fiscal 2024. However, while the system upgrades as necessary to restore earnings growth, one won’t see the company building an advantage over rival Sonic Healthcare, which is also continuously improving its systems.

Virtually all revenue is earned directly from Medicare via bulk-billing in the pathology and imaging segments. Healius’ organic volume growth in its core pathology segment has typically ranged between 3% and 5% and a similar rate over the 10-year forecast period can be seen. The volume growth is underpinned by population growth, aging demographics, higher incidence of diseases, and wider adoption of preventive diagnostics to manage healthcare costs. In addition, the number of tests available is expanding. Increasing complexity of tests, such as veterinary and gene-based testing, is also resulting in average fee price increases. Pathology has a high fixed cost of operation and thus benefits from volume growth to drive lower cost-per-test outcomes. Higher testing volumes result in a lower cost-per-test as labor, equipment, leases, transportation, and overhead costs are all leveraged. In 2013, the Australian government placed a freeze on Medicare fee rates but resumed indexation in fiscal 2021 for diagnostic imaging.

Financial Strengths

After divesting its medical centers, Healius boasts significant balance sheet flexibility. While the sale proceeds were used predominantly to retire debt, Healius also returned AUD 200 million to shareholders in the form of share buybacks in calendar 2021. Nonetheless, in the absence of major acquisitions, the net debt/EBITDA to remain under 2.0 times over the forecast period compared with Healius’ leverage target range of 1.7-2.2 times and its debt covenant of 3.5 times. At June 2022, Healius reported AUD 525 million in net debt, representing net debt/EBITDA of 1.0 times pre-AASB 16. Given the material operating leverage in the business, it is prudent for financial leverage to be at a comfortable level given the uncertainty surrounding COVID-19 testing. Following Healius’ improvement program in the near term, the free cash flow prior to dividends is to settle around 96% of net income at midcycle. The high cash conversion affords Healius to maintain the forecast dividend payout ratio of 60%, within Healius’ 50%-70% target range.

Bulls Say

On top of the base level of COVID-19 testing that is likely to continue, Healius is well-positioned for underlying trends in preventive diagnostic treatments and outpatient care in its day hospitals.
Simplifying the business via the sale of its medical centers is a positive indicator for the ultimate success of the company’s turnaround.
Advances in technology and personalized medicine are increasing the number of complex and gene-based tests available to patients, which are typically higher-margin.

Company Description

Healius is Australia’s second-largest pathology provider and third-largest diagnostic imaging provider. Pathology and imaging revenue are almost entirely earned via the public health Medicare system. Healius typically earns approximately 70% of revenue from pathology, 25% from diagnostic imaging and a small remainder from day hospitals.

(Source: Morningstar)

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