Investment Matters

Healius: An update

Who is Healius?

Healius provides health care services in three categories: medical centres, pathology and diagnostic imaging.

The medical centres division comprises (usually large format) primary healthcare clinics.  The core service is GP (general practice), with increasing offerings of other health services such as dentists and allied health.  It also encompasses the new businesses of day hospitals and IVF.

Healius’ pathology division encompasses 100 laboratories and over 2,200 collection centres across Australia, including brands such as QML Pathology and Dorevitch Pathology.

The diagnostic imaging division, under the brands Healthcare Imaging Services (HIS) and Queensland Diagnostic Imaging, operates 140 sites across Australia, with over 110 radiologists.

The breakdown of contribution from these divisions is provided below (as per the H1 FY-19 results by segment):

 

IM graph 1 IM graph 2

Source: Healius H1 FY-19 Report, First Samuel.

Investment history

First Samuel initially invested in Healius (then called Primary Health Care) in Feb-08.  Since then we have added to and reduce our exposure from time to time, as our view on valuation (including relative valuation) changed.  However, it has remained a core long-term investment for over a decade now.

Healius has also been a valuable source of dividends over this time (the vast majority of which have been fully franked).

Turnaround

Over the last four years Healius has gone through a period of change and restructure.  A core issue has been that their assets (especially the healthcare centres) have not been run optimally.  Issues that drove this included GP recruitment and remuneration structures, and the efficiency (or lack thereof) of their healthcare centres.  Additional issues were taking on too much debt, and management changes.  Pleasingly, there is now evidence that this has started to turn around (for instance, as detailed in the recent reporting season).

We expect that the ‘fruits’ of the turnaround, along with the considerable investments that the company has made in recent years (such as expansion into IVF, investment in IT systems, acquisition of day hospitals, and expansion of dental services), to translate into improved earnings performance in coming periods.

Investment thesis

Considering the bigger picture, Healius has great assets and capabilities (health care centres, along with imaging and pathology).  It is exposed to a growing demand dynamic – with Australia’s aging population and growing utilisation of health care services.  Combined with the turnaround mentioned above, we assess that these factors stand the company in good stead for the future. 

Takeover offer & other matters

And it isn’t just us that thinks this.  Takeover interest has been floating around recently, including an indicative expression of interest (as a first takeover approach usually is) from Jangho Hong Kong Holdings Limited (Jangho).  At $3.25 per share, Healius’ Board rejected the offer as undervaluing the company (we concur).

The recent bounce in the share price (from early April-19) we attribute at least in part to the Medicare proposals being put forward by Labor, including removal of the indexation freeze on GP visit costs, and provision of free diagnostic imaging for cancer patients.  These measures are positive for Healius, and we see them as being consistent with the growing need and demand for health care services (as mentioned above).

And a final note – the severity (or otherwise) of the flu season can impact Healius’ financial result in some years.  We saw this in the recent half year result with a benign flu season dampening results in both pathology and medical centres.  Being longer-term investors, we are able to look through this volatility.

Conclusion

Healius has been, and continues to be, a core holding in your equity portfolio.  It is exposed to a positive dynamic of an aging population with a growing need for health services.  With a turnaround of business operations, and investments that will assist future growth, we view the future positively for the company.

-      Fleur Graves