-Profitability should improve in pathology
-Capital raising concerns removed
-Need to focus on reducing rental costs
Credit Suisse can envisage a path to improved profitability in pathology. Historically, the broker notes the company's pathology department has operated at a lower earnings (EBIT) margin compared with rival
The transition to a specialist diagnostic and day hospital operator is far from complete, Morgans suggests. There is risk around GP referrals, while work on the cost base is required and growth initiatives are unclear.
Citi believes the divestment of a complex medical centre business will mean earnings are less volatile and less capital intensive and assumes normalised earnings in FY21. The broker does not make changes to forecasts yet, given the long settlement period of the transaction.
Balance Sheet
The company has divested the medical centre business to private equity firm
The medical centre division comprises 62 dental clinics, 69 medical centres and 13 Health & Co practices.
Moreover, the company has had a history of "one-off" costs that have reduced reported earnings and the broker now assumes this will cease and management can generate a profit at the underlying level.
Macquarie agrees the balance sheet should improve and the operating structure will be simpler as a result, while concerns about a capital raising have been removed. Revised forecasts imply FY21 gearing of 1.3x and, on the broker's calculation, there is around 15% upside to the current share price.
Costs
Credit Suisse concludes that the greatest opportunity to improve the profitability of pathology is through rationalising the cost base, particularly collection centres. Hence, reducing rental costs is a key area of focus. Healius has officially closed around 50 collection centres during FY20 and during the height of the pandemic up to 500 were temporarily closed to manage costs.
Credit Suisse does not believe this is temporary, rather it is a strategy the company will use to improve the profitability of the division. The broker expects, as this occurs, the pathology earnings margin will expand to 11.6% in FY22.
Driving margin expansion will be the laboratory information system, which is software aimed at increasing functionality and improving turnaround times. Credit Suisse expects an update on the strategy and investment plans at the full year results in August.
Morgans has downgraded to Hold from Add. The broker includes the divestment in estimates but believes it remains challenging to accurately forecast the impact from the pandemic. More work is required to be done before the platform will provide the benefits that will confidently support future growth.
FNArena's database has three Buy ratings and one Hold (Morgans). The consensus target is
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