Buy Hold Sell: 5 ASX healthcare names to fix what ails you

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Edited Transcript

Chris Conway: Hello, and welcome to Livewire's Buy Hold Sell. My name is Chris Conway. The ASX healthcare sector has been one of the worst performers over the last 12 months. The third worst, in fact, down 2% over the period. So, is the sector due for a turnaround? And which stocks might lead the charge? To help answer those questions, I'm joined by David Wilson from First Sentier and Matt Williams from Airlie. Gents, welcome to Buy Hold Sell.

David Wilson: Thanks, Chris.

Matt Williams: Thanks, Chris.

Why has healthcare lagged?

Chris Conway: All right, let's get into it. First question, the obvious one, why is the sector lagged and is it due a turnaround? David, I'll start with you.

David Wilson: You have to look at the fact that it's actually really down to stock specific. CSL, Ramsay (ASX: RHC) and Sonic (ASX: SHL) represent a bit over 60% of the healthcare index. And those stocks are materially underperformed for stock specific reasons.

Whereas you look at the likes of Pro Medicus (ASX: PME), ResMed (ASX: RMD) and Cochlear (ASX: COH), which are about a quarter of the index, they've actually done really well. So, you can really attribute it just to the stock specifics of those three particular companies.

Matt Williams: Sigma's (ASX: SIG) in that index as well, and it's done really well over the last 12 months.

David Wilson: That's a good point.

Chris Conway: Matt, same question, is it due for a turnaround?

Matt Williams: I think it is, but it's going to be quite stock specific how the turnaround plays out.

Key themes for future growth

Chris Conway: Let's focus on some of the key themes that might drive some future growth. What are you looking at?

Matt Williams: Look, it's always an ageing population. It's innovation that the companies have. It's about new ways of doing business, particularly as the insurers look to push more efficiencies through the market. And then, of course, who knows what AI brings to the party in the health sector over the next few years.

Chris Conway: David, anything to add there in terms of innovation?

David Wilson: Again, I'll come back to the stock specifics. Again, you look at Pro Medicus, it's about them penetrating the U.S. Market some more. And for stocks like ResMed, Cochlear and CSL, it's really about, as Matt said, the innovation that they can bring to bear with new products and new developments. I think that's a key driver for them.

CSL Limited (ASX: CSL)

Chris Conway: Let's get into the stocks. You just mentioned one of the ones we're going to lead with, David, it is going to be CSL. It's impossible to talk Aussie healthcare without talking about CSL, it's the big daddy, buy, hold or sell for you, David?

David Wilson (HOLD): It's an interesting one. As we go around and talk to the financial planning community, it's the stock we get probably quizzed on most, almost as much, actually, I should say, as CBA. And what I'd say about CSL is that this reporting season, I would say it's one of the most important results of this reporting season.

Where they really need to show that they can regain the mojo that they've had of previous years and prior to basically the Vifor acquisition, which ended up a horror story. So, for us it's a hold, but if they can regain that mojo, then... Again, it could be a real long-term driver of portfolios, but they really need to prove themselves in this result.

Chris Conway: Matt, it has been in a sideways grind, I should say, for a couple of years now. It's actually down 11% in the past 12 months. Any value there? Buy, hold or sell?

Matt Williams (BUY): Look, it's a buy for us. I totally agree with David, though, that this is a crucial result. Management needs to restore some credibility, and this is a chance for them to do so. Externally, the market for them remains pretty good. I mean, there's been tariff worries, there's been vaccine worries, but they're outside their control.

But their core products, their core business, is actually, we think, travelling fairly well. All the other things that we want to hear from management at this result are self-help kind of stuff. And they have enormous levers, we think, to pull to really generate some increased shareholder return.

Sonic Healthcare (ASX: SHL)

Chris Conway: Next up, we're going to talk about Sonic Healthcare. It operates labs, pathology, radiology, and general practice. Matt, I'll stay with you, buy, hold or sell?

Matt Williams (HOLD): Look, it's a hold for us. Shout out to Colin Goldsmith and Chris Wilks. They've been around since the early 90s as running this company, and they've done a fantastic job. Probably they were there before David was even in the market.

It was a long time ago, 30-plus years they've been running this company. Look, the problem I have with it is they're going to earn the same earnings per share this year that they did in 2016. I think it's very hard to get growth.

Government is the biggest payer. The government keeps a lid on what returns Sonic are going to get. It's actually on the same multiple, around 24 times that CSL is on. And even ResMed, which I think are much better options.

Chris Conway: David, been fairly uninspiring from a share price perspective. 2% I believe, over the past year. Any interest for you? Buy, hold, sell?

David Wilson (SELL): It's a sell. It's been really uninspiring for a long period of time. They've built a global presence both in Europe and North America, but EPS has grown at 1 to 2% over the last decade. And ROE on the business is 7 to 8%. So, for me, it's a sell.

Ansell (ASX: ANN)

Chris Conway: Next up we're going to talk about Ansell, everyone knows Ansell for the latex gloves, but they do do a wide array of personal protective equipment. David, start with you, buy, hold, sell?

David Wilson (HOLD): For us, it's a hold. I think Neil Salmon has actually done a very good job. And steadied the business, its growing earnings slowly. Importantly though, it is how it is able to build durability. In the most recent acquisition, they did the KCPPE business. So, for us, it's a hold. It's not particularly inspiring, but I think the management's done a great job and it's in a reasonable place.

Chris Conway: Matt, up 11% over the last 12 months, any interest for you? Buy, hold, sell?

Matt Williams (HOLD): It's a hold. I agree with David. I think it's pretty dull, but it's priced for it. I agree that Neil has done a good job. There's tariff worries, there's tariff exposures to it. But look, they'll work their way through that. Most of their competitors I think are probably exposed to the same tariffs. But look, it's just uninspiring, relative to maybe some other names in the sector.

Guest picks

Chris Conway: Let's talk about some of those other names. My favourite part of Buy Hold Sell is asking the gents to bring along a stock that they like in the space. Matt, what's your healthcare pick for the next 12 months?

Sigma Healthcare (ASX: SIG)

Matt Williams (BUY): Look, it's a bit cheeky calling it a healthcare stock, but it's Sigma/Chemist Warehouse. It is in the index. Look, it's had a great 12 months already, and it's going through a bit of turbulence at the moment with index and insider selling.

It's something I think you really want to bottom draw for the next five years. It's such a good business. We all know the attraction of it. It's still got good rollout potential here in Australia. There is rollout potential overseas. I think it's a real concept that will travel overseas.

They're testing it in Ireland at the moment with some success. So, I think it's a business that prima facie looks quite expensive at the moment on a PE kind of basis, but I think it's one you do want to own over the next five years.

Chris Conway: All right, Sigma for Matt. David, bring us home. What have you got for us in the healthcare space?

Resmed (ASX: RMD)

David Wilson (BUY): We also like Sigma, but the stock that we prefer even beyond that is ResMed. And this is a stock where I'll give a shout out to, not just ourselves, but even our competitors in the market. This is the one where a year or so ago, the Americans were absolutely smashing this stock on a GLP-1 fee.

They took the stock from the low thirties down to the low twenties, and ironically, it was actually the Australian investors to the rescue, and we went from 30% to 40% of the register as the Americans were selling. So, we think the company, it's got 60% plus market share. Its masks are growing at more than double-digit. Its devices are growing at high single digit. It's going to get consistently 10% plus EPS growth over the next little while. So, this is a stock we like a lot. So, for us, it's ResMed.

Chris Conway: There you go, some top quality healthcare picks. Massive thanks to Matt and David for this entire series of Buy Hold Sell episodes, the sector specials. If you enjoyed this one, make sure to give it a like. And don't forget to follow our YouTube channel, we're adding lots of great content every single week.