ASX health stock rise in past five days along with broader markets
Mach7 looks to be cashflow positive in FY24 as outlook remains strong
‘Chronic underperformer’ Healius confirms debt refinancing
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.
Do you enjoy exercise or need some extra motivation to get moving? A recent study has shown that exercise supports brain health by prompting muscles to release molecules involved in cognitive function.
Published in the Proceedings of the National Academy of Sciences, the study reveals that when muscles are activated, they send signals to the brain by secreting bioactive molecules and nanoparticles, which enhance brain function.
While previous studies on brain health and exercise found direct correlations between the hippocampus size and regular physical activities in the new study, researchers investigated the nervous system and musculoskeletal functions to gain deeper insights into brain-body interactions.
The study involved stimulating muscles with glutamate to observe the response of nerve function. Researchers used models of muscle tissue, distinguishing between the innervated and non-innervated tissues, and found that innervated tissue conveyed more signals to the brain.
Given that neuron function in muscles may decline with age or injury, researchers sought to investigate how this loss might impact brain health.
Corresponding author of the study Hyunjoon Kong, PhD from the Univeristy of Illinois Urbana-Champaign, told Medical News Today the findings highlight the importance of maintaining musculoskeletal health, not just for cardiovascular health or mobility, but also to combat neurological degeneration.
“As individuals age, they gradually lose the well-formed neuromuscular junctions between nerves and muscles, impairing the muscles’ ability to be regulated by nerve signals and subsequently reducing their capacity to secrete factors critical for brain function,” Kong says.
“With appropriate training or stimulation for muscle contractions, muscles can produce factors that help maintain these neuromuscular junctions, thus preventing denervation.”
To markets…
And ASX health stocks are looking pretty healthy this week. At 12.30pm (AEDT) on Friday the S&P/ASX 200 healthcare index (ASX:XHJ) was up 1.9% for the past five days, while the benchmark S&P/ASX 200 (ASX:XJO) rose 1.6% for the same period.
“It’s been a positive week all round with not too many down days and the large caps are running hard and the smaller and mid cap names are starting to look healthier,” Power says.
“The Federal budget didn’t seem to have to much of an impact on the market and from a life science perspective it was good to see the R&D Tax Incentive program maintained and payments will increase over the next couple of years.
“The Medical Research Future Fund also has had its funding extended so that is positive for the sector.”
Powers says expectations of rate hikes seem to have subsided with Morgans chief economist Michael Knox forecasting there won’t be a rate cut in Australia in 2024 and we will have to wait until 2025 until rates come down.
Mach7 looks to be cashflow positive in FY24
Power says Morgans had an upbeat presentation from Mach7 Technologies (ASX:M7T) CEO and managing director Mike Lampron on his visit to Australia from the US this week as the company eyes cashflow positivity for FY24.
The enterprise Imaging solutions company recently reported its Q3 FY24 results, which included 20% growth in annual recurring revenue and record contracted annual recurring revenue of $28.2m.
M7T is forecasting to be cashflow positive in FY24 due to careful cost management, increased fees for licence renewals and improved receipts predictability for subscription contracts.
Power says the outlook remains strong for M7T with its continuing trend toward subscription contracts make the company a more attractive proposition to a wider range of investors.
“Lampron has reconfirmed FY24 guidance and the key components of that include an order book greater than $60 million and revenue to come in at between $27 and $30 million and to be cashflow positive for the year,” Power says.
“That business is looking like it is really heading in the right direction.”
He says M7T is one of his colleague’s Iain Wilkie’s top picks, who is lead analyst on the stock.
Morgans has an Add rating on M7T and 12-month target price of $1.56.
US tariff rise on China imports to have minimal impact on Ansell
Morgans says it has been fielding questions on the impact of US President Biden’s tariff increase on US$18bn of China imports covering everything from EVs and batteries, to solar cells and ship-to-shore cranes.
In relation to medical products, tariffs on rubber medical and surgical gloves will increase from 7.5% to 25% in 2026, which Morgans healthcare analyst Derek Jellinek says will have little impact on large cap Ansell (ASX:ANN), which operates in the personal protective equipment space (PPE) space.
Jellinek says while ANN’s healthcare division represents ~40% of underlying profit, with exam/single use gloves 60% and surgical gloves ~30% of total sales, and the US is ~55% of global sales, Morgans don’t view the tariff increase on Chinese-manufactured gloves as a windfall, given:
ANN’s competitive advantage stems from its higher-priced, more differentiated product range which is underpinned via innovation and technology and it is not known as a ‘generic’ rubber glove manufacturer
ANN has been shifting away from natural rubber latex to more synthetic materials such as polyisoprene and neoprene to further differentiate its products
Over the past 10 years, ANN has expanded into new areas such as chemical clothing, life sciences and industrial exam
“We see manufacturers of more generic’rubber gloves as the main beneficiaries of US tariffs, for example Top Glove, Showa Best, Sritrang, Molnlycke, Hartalega, Kossan, and Supermax,” Jellinek says.
Morgans has a hold rating on ANN, which is trading slightly above its 12-month target price of $25.61.
‘Chronic underperformer’ Healius refinances debt
Pathology and diagnostic imaging service provider Healius (ASX:HLS) this week announced it had refinanced its debt, scaling back demand and size of Tranche A to $180m from $250m of its syndicated debt facility totalling $680m.
Tranche B of $500m expires March 27. Despite the scale-back, management believes it has “sufficient headroom and liquidity for its operations”.
Gearing covenants based on underlying EBITDA for both facilities are 4.5x for the 12 months to June 30, 2024 and December 31, 2024, before reverting to 3.5x for subsequent annual and half year reporting periods.
“While it’s good to see HLS get away a refinance to help fortify its B/S, with lenders offering a less onerous covenant through CY24, a nearly 30% haircut on the originally requested amount may hamstring ongoing efforts to right this ship,” Jellinek says.
HLS is undertaking an ongoing strategic review of the company’s structure and all assets, with CEO Maxine Jaquet resigning and handing over the reins to CFO Paul Anderson in March.
At that time, Anderson said the process of the strategic review would be run “expeditiously” with a focus on “structuring and operating the business with a clear goal to maximise their (investors) investment”.
“So, it still remains early days, and until we get better idea on how this will all play out, we remain on the sidelines,” Jellinek says.
Power says HLS has a long way to go in winning back investor confidence.
“Healius has been a chronic underperformer for years and years,” he says.
“Now its basically been pruned back to pathology and radiology and have divested a lot of their other businesses. ”
Morgans has a hold rating on HLS with a 12-month target price of $1.32.
The M7T, ANN, HLS share price today:
ScoPo’s Powerplay – Countdown on to Avita Medical FDA approval
US headquartered wound care company Avita Medical (ASX:AVH) is Power’s stock of the week. AVH this week announced its Q1 CY24 results, which Power says was in line with its previously downgraded guidance although expenses were higher than expected.
For the three months ending March 31, AVH reported a 5.8% lift in commercial revenue on pcp to $11.1 million, while the gross profit margin came in at 86.4%.
“The good part of the result was they have reconfirmed their CY24 guidance – they have a calendar year end – and also maintained their profitability target of the third quarter of 25 so we see that as positive,” Power says.
“The only negative was that their expense base was quite large although it did include some one off costs which they were able to explain away in terms of inventory build up for one of their new products coming through PermeaDerm.”
Power says the next big catalyst for AVH is pre-market approval (PMA) by the US FDA under its Breakthrough Device Program for RECELL GO, which management confirmed in their quarterly results as being on track for May 30 US time (May 31 Australian time).
RECELL Go is an introduction of an automated workflow to its manually operated RECELL. Management explains RECELL GO as “a device which provides consistent disaggregation of skin to produce RECELL Spray-On Skin Cells”.
Power says Morgans is confident in the approval and subsequent share price lift.
“That’s a major catalyst and the share prices is still pretty subdued at the moment and its a good opportunity,” he says.
Morgans has an Add rating on AVH but has reduced its 12-month share price to $5.60 from $6.40.
The AVH 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.
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Disclosure: The author held shares in Mach 7 at the time of writing this article.
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