ASX health sector flat for week as broader market falls during volatile reporting season
Avita Medical reports strong full year FY23 results, forecast to reach cashflow breakeven in FY25
Clinuvel Pharmaceutical H1 FY24 results below consensus and Morgan’s forecasts
Healthcare and life sciences expert Scott Power, who has been a senior analyst with Morgans Financial for 26 years, explains what the movers and shakers have been doing in health and gives his ASX Powerplay.
How is your gut health? A new study published in the journal Gut reveals a significant association between adopting healthy lifestyle choices and a reduced risk of developing irritable bowel syndrome (IBS).
The research, conducted on 64,268 individuals with an average age of 55 from the UK Biobank, focused on five key behaviours including:
Not smoking
high level of vigorous activity
Optimal sleep of 7 to 9 hours nightly
High-quality balanced diet
Moderate alcohol consumption
Analysing the medical and dietary data gathered through at least two 24-hour dietary recalls, the researchers categorised the participants based on their engagement with these behaviours.
The findings revealed those embracing a higher number of these healthy behaviours experienced a lower risk of developing IBS.
Adopting a single one of the five healthy lifestyle behaviours led to a 21% decrease in risk, while embracing two behaviours resulted in a 36% lower risk. Engaging in three to five of these behaviours correlated with a 42% reduction in risk.
Among the identified healthy behaviours, the three most crucial contributors to risk reduction were abstaining from smoking, maintaining a high level of physical activity, and ensuring a good night’s sleep.
While several studies have found that stress can also contribute to development of IBS it was not a focal point of the study.
To markets…
And ASX health stocks are looking somewhat irritable this week. At 1pm (AEDT) on Friday the S&P ASX 200 healthcare index (ASX:XHJ) was fairly flat, down 0.9% for the past five days, while the benchmark S&P ASX 200 (ASX:XJO) fell 0.16% for the same period.
The ASX is still in the midst of reporting season, which Power says has been “up and down” for the healthcare sector.
“We’ve had a few names that have gone against our expectations and a couple of stocks that have absolutely ripped,” he says.
Power says it has been a volatile start to CY24 with the macro picture all about expectations of when interest rates will start to fall.
“The solid run in November and December was on the view that interest rates would start to fall sooner rather than later but those expectations have been pushed back a quarter or two,” he says.
Avita expects to reach cashflow breakeven no later than Q3 FY25
Power’s pick from last week, US headquartered wound care company Avita Medical (ASX:AVH), has reported a strong full year FY23 results and is forecast to reach cashflow breakeven in FY25.
AVH reiterated previously announced financial guidance including revenue up 46% to US$49.8 million with a gross profit margin of 84.5%.
Commercial revenue grew by 46% to US$49.8 million. Including revenue from the Biomedical Advanced Research and Development Authority (BARDA), total revenue was US$50.1 million.
Gross margin was 84.5%, compared to 82.4% in pcp, while total expenses were US$86.4m, up 46% on pcp.
AVH expanded its commercial sales team expansion from 70 to 108 in Q1 FY24 to drive accelerated growth in full-thickness skin defects.
The company expects its RECELL Go product to receive FDA approval by the end of May, in line with expectations. PermeaDerm launch is expected in March 2024, and will be sold through the company’s existing salesforce.
Morgan’s lead analyst on AVH Emily Porter says importantly AVH has provided profitability guidance and expect to achieve cashflow profitability no later than Q3 FY25.
“AVH – did not disappoint us at all with in fact reconfirmed CY24 guidance of greater than 50% revenue growth which is outstanding and confirmed a target of profitability by Q3 CY25,” she says.
“AVH remains a key pick for the Morgans Healthcare team.”
Morgans has an rating on AVH and maintains its 12-month target price of $6.40.
Clinuvel results ‘less than compelling’
Skin disorders specialist Clinuvel Pharmaceuticals (ASX:CUV) has released its H1 FY24 results, which Morgans healthcare analyst Iain Wilkie wrote in a note to clients, lands below consensus and Morgans’ forecasts.
Revenue was up 10% to $32.3 million, below Morgans’ estimates of $35 million and consensus of $34.8 million. On a constant currency basis revenue was up 4%, a much weaker result than expected. There was 10% growth in the EU/US and 11% in Switzerland.
Wilkie wrote weaker-than-expected results were driven by single digit EU growth and small US growth despite growth in specialty centres online and active.
“Expense growth was the bigger surprise, up 28% with employee costs share-based-payments (non-cash) increasing by 32% and 47% respectively,” he wrote.
“This led to a NPAT decline of 4% to $10.9 million (Morgans’ forecast $14 million/consensus $13.9 million) and well below expectations.”
The company reported having $175 million net cash and equivalents at quarter end, up 11.6% on the pcp.
“We view CUV as a trading stock in the short term, but falls short of set-and-forget given the risk around alternative therapies and potential generic competition in time,” Wilkie wrote.
“While we don’t see any immediate threat to cashflows over the coming few years, investors should expect competition over the next decade.”
Furthermore, CUV announced this week non-executive director Willem Blijdorp resigned from the board. Blijdorp was chairman from 2019 until the AGM in October 2023.
“Optics around immediate departure of Willem likely raises questions around plans for his 3.5% holding in CUV,” Wilkie wrote.
He says board and management have come under fire more recently, suggesting broad discontent with the current board and management.
“Paired with timing around a long-time board member leaving, not a great result and unlikely to stimulate much confidence in the name at this stage,” Wilkie wrote.
Morgans has downgraded its rating for CUV from add to hold on CUV and 12-month target price from $22 to $16.
EBOS profits rise
Major pharmaceutical distributor EBOS Group (ASX:EBO) has announced its H1 FY24 results with underlying NPAT up 7.6% to $152.4 million.
Revenue was up 7.1% to $6.58 billion, above Morgans’ forecast of $6.4 billion while, underlying EBITDA was up 8.3% to $313.2 million with a 4.7%.
Power says operating cash flow was solid, albeit down 28.3% to $115.6 million driven by strong underlying EBITDA, offset by finance costs, tax and net working capital.
Net debt increased to $1,088 million (from $767 million at June 2023) with a leverage ratio of 2.06x. ROCE remains within its target range at 15.1%.
“This is a company that has grown its earnings on average by at least 10% for the last nine years which is pretty outstanding,” Power says.
“They have continued on that vein with a solid 8% first half profit report.”
Power says from July 1, 2024 CUV won’t have the Chemist Warehouse contract anymore so their 2025 earnings will take a bit of dip.
“We’ve got a lot of confidence in their diversified revenue streams to be able to pick that up over subsequent years,” he says.
“The highlights for us are a very strong margin improvement in their animal care business through cost reductions initiatives and over the next 12-24 years they’re targeting about 5% off their billion cost base, so about $50 million.
“We think they’ll recover that earnings trajectory very quickly after 2025 but certainly the year we’re in is looking solid.”
Morgans has an add rating on EBO but has reduced its 12-month target price from $39.43 to $39.20.
Monash H1 FY24 results in line with expectations
Reproductive medicine provider Monash IVF Group (ASX:MVF) announced its H1 FY24 results on Friday.
MVF reported revenue increased 21.7% on pcp to $125.7 million, underlying group NPAT increased 18.7% to $15 million, which Power says was at the top end of the guidance range.
MVF reported EBITDA of $30 million, up from $24.3 million on pcp with underlying EBITDA of $32.2 million. The EBITDA margin was 25.6%, largely in line with pcp 25.9%, versus Morgans forecast of 25%.
Group Revenue was $125.7 million up 21.7% which was driven by price increases, industry growth, market share gains and contribution from MVF’s PIVET acquisition.
Australia stimulated cycles were up by 15.1% to 5,823 cycles compared to industry growth of 5.1%, and frozen cycles rose 14.3% to 4327 cycles.
Industry volumes remain elevated from pre-Covid levels. Overall, in the Australia market, MVF’s market share was 20.9%, up 180 bps from 19.1% in the pcp.
Also lead analyst on MVF Porter says structural growth looks set to continue in the IVF industry driven mainly by improving pregnancy rates, increased genetic testing and favourable government funding.
“Monash has delivered another strong performance and continues to gain market share with now 20.9% of cycles in Australia,” she says.
“Monash see structural growth in the industry trending to 5% per annum from 2-3% driven by new services (genetics testing), growing patient segments (LGBTQIA+, single parents) and new channels (sport/ corporate).
“We believe MVF will deliver consistent profitable growth over the next three years.”
Morgans has an add rating on MVF and maintained its 12-month target price of $1.50.
Healius downgrades FY24 profit
Pathology provider Healius (ASX:HLS) has downgraded underlying profit by double digits, given lower H2 FY24 expectations for pathology volumes and benefits.
While Q1 saw high single-digit Pathology volumes and double-digit benefit growth, momentum faded in Q2, with both metrics tracking in the low single-digit range.
Soft GP attendances, along with with labour shortages and inflationary pressures appear to be holding back volumes.
In a note to clients Morgan’s healthcare analyst Derek Jellinek says while management is aiming to accelerate pathology restructuring to better match volumes with costs, activity to date seems to have done little to move the dial, putting greater uncertainty around a solution and complete near-term turnaround.
HLS will release H1 FY24 results on February 27.
Morgans has lowered its FY24-26 estimates, with a hold rating on the stock and target price dropping from $1.65 to $1.37.
The AVH, CUV, EBOS MVF & HLS share price today:
ScoPo’s Powerplay – Sonic still a ‘good portfolio name’
Australia’s second biggest healthcare company, Sonic Healthcare (ASX:SHL) is Power’s pick of the week, despite its share price down ~10% in the past five days following announcement of its H1 FY24 results including profits coming in 47% lower.
The internationally renowned healthcare provider with specialist operations in laboratory pathology, radiology, general practice medicine and corporate medical services sits second behind CSL (ASX:CSL) on the the ASX’s biggest healthcare stocks list.
Total revenue for H1 FY24 came in at $4.3 billion, up 5% on the pcp. However, EBITDA declined by -20% to $737 million, while net profit tumbled by -47% to $202 million.
In a note to clients Jellinek says H1 FY 24 results were mixed, as elevated costs impacted margins and the bottom line, while revenue and underlying results were broadly in line.
“The base business (ex-Cvid-19 testing) continues to perform well, with growth across all key geographies, while radiology also showed strong, but clinical services remains soft on lower Covid-19-related services,” he wrote.
“However, management remains confident in a turnaround, outlining numerous near/medium term drivers supporting underlying profitability and reflected in guidance, which we view as achievable.”
Power says Morgans is still keen on SHL, particularly as a good portfolio name.
“It was an okay result we thought and it was very heavily skewed to the second half and they have a tonne of growth options coming through,” he says.
“But the market didn’t like that big skew to the second half and pushed it down for a couple of days.”
Morgans has an add rating on SHL but has reduced its 12-month target price from $36.55 to $34.05.
The SHL share price today:
The views, information, or opinions expressed in the interview in this article are solely those of the interviewee and do not represent the views of Stockhead. Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.
Disclosure: The author held shares in Sonic Healthcare and CSL at the time of writing this article.
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