Category: Expert Insights

Business Strategy and Outlook:

As demand for PCR testing surged during the omicron wave, higher positivity rates limited the ability of pathology providers to pool tests, causing significant delays and accelerating adoption of rapid antigen tests. While Healius is improving its turnaround times, management admitted that the sector wouldn’t be able to keep up again if a similar surge were to occur. Despite bolt-on acquisitions, revenue of AUD 200 million was flat on the prior corresponding period. This was largely driven by pandemic impacts including elective surgery restrictions and fewer medical centre referrals. Healius continues to increase its exposure to higher-margin modalities, and the company remains on track with its costout initiatives such as digitisation and network optimisation.

Despite Virtus deciding not to proceed with the acquisition of Adora, Healius is still classifying the business as a discontinued operation and suggested a sale to a different party is imminent.

Financial Strength:

Healius’ interim 2022 underlying EBIT rose 177% to AUD 376 million driven by operating leverage from elevated PCR testing. Healius declared a fully franked interim dividend of AUD 0.10 per share. Net debt/EBITDA was 0.4 at half-end, but it is expected that gearing to slightly increase following its Agilex acquisition. Segment EBIT margin also contracted roughly 200 basis points sequentially to a depressed 6% on higher locum staff costs due to radiologist shortages.

The smaller imaging segment, which contributed just 3% of group underlying EBIT, was weaker than expected. Despite bolt-on acquisitions, revenue of AUD 200 million was flat on the prior corresponding period. This was largely driven by pandemic impacts including elective surgery restrictions and fewer medical centre referrals. Segment EBIT margin also contracted roughly 200 basis points sequentially to a depressed 6% on higher locum staff costs due to radiologist shortages. This was despite support labour, excluding radiologists, reducing 4% on average per site.

Company Profile:

Healius is Australia’s second-largest pathology provider and third-largest diagnostic imaging provider. Pathology and imaging revenue is 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)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.

Business Strategy and Outlook

Raytheon Technologies is composed of United Technologies’ aerospace businesses and legacy Raytheon, each of which is a powerhouse in the commercial aerospace supply chain and defense prime contracting industries, respectively. The combined entity is fundamentally unique due to its relatively even balance between commercial aerospace and defense prime contracting; most other entities in the industry are heavily skewed one way or the other. 

In commercial aerospace, Pratt and Whitney, Raytheon’s jet engine manufacturer, is amid a large ramp up for the Geared Turbofan engine to support its placement on the popular A320neo family of aircraft. Engines are a razor-and-blade business, with the razor being the original component sale and the blade being servicing. Pratt has narrow-body exposure A320s through the V2500 engine and to the A320neo and the A220 via the GTF engine. While it is somewhat concerning, that some older A320s will be retired during the pandemic, it is viewed  long-term tailwinds for the GTF. Collins Aerospace is one of the largest diversified commercial component suppliers, and it is held, that the segment’s substantial scale and scope give it negotiating leverage with the aircraft manufacturers, as they can choose to not put in a bid on critical components of new aircraft. 

Within defense, Raytheon is exposed to missiles, missile defense systems, space militarization, and IT services for the government. It is anticipated that the military’s increased focus on defending against great powers conflict will drive material investment in each of these exposures, excluding government IT services. The fiscal stimulus used to support the U.S. economy during the COVID-19 pandemic dramatically increased the U.S. debt and higher debt levels are usually a forward indicator of fiscal austerity. It is likely a flattening, rather than declining, budgetary environment as it is held that heightened geopolitical tensions between great powers are likely to buoy spending despite the debt burden. It is likely that contractors can continue growing despite a slowing macro environment due to sizable backlogs and the national defense strategy’s increased focus on modernization.

Financial Strength

Raytheon Technologies is materially deleveraging from the spin-offs of Otis Elevators and Carrier, as well as merging in an all-equity transaction with a much less leveraged Raytheon. It was historically seen that United Technologies carried too much debt from the Rockwell Collins acquisition, roughly three and a half turns of gross debt/EBITDA in 2019 but were confident in the firm’s financial health due to long-term revenue visibility stemming from the large backlogs at the aircraft manufacturers. As it stands today, Analysts’ are more confident in the firm’s capacity to service its relatively smaller debt burden because it will be taking on an ultra-long cycle defense prime contracting business, which has decades of revenue visibility and regulated margins, so Analysts’ are confident in Raytheon Technologies’ ability to service the debt load, the underfunded pension, and the dividend. Analysts’ estimate the firm will end 2022 with gross debt at about 2.7 times EBITDA, it is awaited that the company will continue to deleverage for the time being, so that the company would be positioned to potentially re-lever for an acquisition a few years down the road. Given that the substantial consolidation that has already occurred in the defense prime contracting industry makes it difficult to find potential hardware contractors to acquire and there has always been a lack of potential targets for Pratt & Whitney, it is held that Raytheon Technologies would acquire one of the many component manufacturers in the aerospace supply chain to Collins Aerospace.

Bulls Say’s

• Pratt & Whitney’s placement on the A320 family and A220 aircraft should substantially increase the company’s installed base of engines, which would unlock decades of high-margin servicing revenue. 
• The firm’s missile and missile defense segment produces products that are prioritized by the National Defense Strategy, which should lead to consistent growth. 
• Raytheon Technologies is well balanced between commercial aerospace and defense, which would partially insulate the combined firm from a downturn in either segment.

Company Profile 

Raytheon Technologies is a diversified aerospace and defense industrial company formed from the merger of United Technologies and Raytheon, with roughly equal exposure as a supplier to the commercial aerospace manufactures and to the defense market as a prime and subprime contractor. The company operates in four segments: Pratt & Whitney, an engine manufacturer, Collins Aerospace, which is a diversified aerospace supplier, and intelligence, space and airborne systems, a mix between a sensors business and a government IT contractor, and integrated defense and missile systems, a defense prime contractor focusing on missiles and missile defense hardware. 

(Source: MorningStar)

General Advice Warning

Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.