Healthcare sector update

Morgans Financial Limited

Scott Power and Derek Jellinek discuss CSL Limited, Healthscope, Ramsay Health Care, ResMed, Sirtex Medical, Nanosonics, and Ansell following reporting season. Transcript, podcast and video below.

Nanosonics

Nanosonics has been very disappointing, and what we were looking for was some commentary into 2018, which we got. After some initial weakness, we did see that share price recover nicely. It recovered after the company told us that they were investing heavily into R&D, so taking their nine million dollar spend up to 15 million dollars. Over the next two years, they'll bring two new products to market. So, the market really appreciated that. We saw the share price recovered around the 2.60, 2.70 mark.

Really like the long-term outlook for Nanosonics, so happy to keep continuing to buy that story.

The Aged Care operators

As I said, they got hit pretty badly after they came out and said that their earnings weren't growing, in fact, going backwards for 2018. Last night we had a major report come out that was tabled in Parliament, David Tune provided an overview of the sector and some potential changes coming through or some recommended changes.

In terms of what we can establish for the Aged Care guys, it appears that there shouldn't be too much impact. A lot of it had been well flagged, but essentially there will be more means testing and greater emphasis on home care packages. So, trying to keep people at home for longer and provide some funding in that respect. We'll get some more detail out on that.

The current share price as the Aged Care operators are yielding around five percent. I tend to think that's going to support them despite the fact that their earnings for '18 are looking pretty weak.

Ansell

I'll tell you, top of the pops for us right now is Ansell. Now, this rubber glove and safety manufacturing company isn't very widely held already across the network, but I would actually say that you should do a little bit of more work in this name and I think you'll be nicely rewarded. Sure, it did sell its sexual wellness division for 600 million dollars last May. This drove 15% of its profit, but I wouldn't say that this is a company that's lacking any mojo. I think it's actually a very interesting company right now, and I'll tell you why.

It's quite unloved, it's unheld, but it's cyclical. It's now a pure play industrial name, and they're kind of playing into the thematic of the cyclical recovery across the globe is what we're seeing. Also what you're seeing is really a conservative guidance. We believe the company's really growing their top line, really good organic growth, really above market. You have a solid cash flow generating business here. It's putting up about an eight percent cash flow yield on that and about 95% cash conversion. So, it's a really good way to turn around cash in this business. It's returning about half this capital from that 600 million dollar divestment into capital management giving balance and half of it back to shareholders from a buy back that's going to drive ten percent accretion into the next couple years.

They're going to save at least ten percent of their profit before tax into 2020, so everything we like to look at and see there. The outlook as far as profit looks really strong, really solid. Looking for a fiscal 18 to ten to 22 percent EPS growth. Ireally believe on our estimates that that earnings momentum can be sustained. We have a three year compounded annual growth rate in the double digits. That's not bad for an industrial company that really trades at a market multiple and a dividend yield of two and a half percent. So, I would say get your gloves on, we're buyers here of Ansell.

CSL

More or less an opportunistic dip-buy, I would say, for CSL. It's been kind of a rollercoaster ride outside of earnings, which they missed. I'm disappointed in their outlook statement. That sent the stock down five percent. Everyone bought the dip as we thought, and the stock is now up five percent since that time. At these levels, I'd be holding some dry powder here. They're about five percent off of our $138 price target. Really, it trades on 26 times forward earnings. That looks a little toppy to me. This year's really a reinvestment year for CSL. It's not really a capital management year, so more capex, less capital management.

That said, we really see solid growth in this company. Really all their products are doing quite well. They're lifesaving drugs, as you would remember, I've viewed their guidance as quite conservative. So, net-net looking to buy the dips, as I said, 120/125 is a range that I look to accumulate for CSL.

Ramsay

Stock sold off on the outlook statement, which disappointed. Investors bought the dip, but they have been sadly disappointed ever since, and we did pull it back to a hold. The problem here is the domestic business is going well, however, it's 50% of the profit of this company. The rest of the world is going backwards. That's the other remaining half. The UK and France are really seeing really strong tariff cuts. It's pricing deflation as well as the labour cost increases and uncertainty of course in the France market as well.

Really, the market's trying to digest if the base business can support the rest of the world into this year. It's going to be a hard struggle. I've always said that Ramsay's always been one to raise and beat. Really consistency is what you're paying for Ramsay, double-digit growth. This year is going to be a little more difficult for them for the reasons I just annunciated. However, the stock has sold off quite dramatically. It's trading at 22 times our forward estimates. That is actually in line with its broader multiple. If I pull out the stock price for that multiple, it'd be around $62. If you can pick this stock up around there, and it's not that far from it right now, on a medium longer-term view, it looks like good buying for me.

Healthscope

As I said before, there's a lot of near-term known unknowns, the new CEO, you have uncertainty with the regulatory environment with a lot of government reviews, you have a sluggish utilisation environment, Guidance, of course, disappointed calling for flat growth year over year. So, really the near term risk remains high. I've said before, it has more hair on it than Bigfoot.

I'll remind you guys, Bigfoot doesn't exist as far as I know. So, we look at this as contrasted against really strong sequential momentum in this business, so I saw half over half. The completed Brownfield projects, and recall that this is driving a third of their profit, those are growing two times above the market rate, which is good to see there.

So, really nothing changing our long-term, medium-term view. Of course, the fundamentals, us growing and greying as I've always said, you can't really change that at all unfortunately. So, that's really underpinning this business as well.

Stock's trading at 14 times forward multiple, healthcare name. Oh, ouch, oh! Ten percent below the market multiple, 35% below Ramsay. Yeah, looks really cheap. Medium, longer term view, as I said, near-term is a little bit bumpy.

ResMed

This company is interesting. It's going through a little transition. So, this is a historical, typical manufacturer and distributor of medical devices to treat what's called Sleep Disorder Breathing. This is a disorder that affects one in four people as most respiratory diseases and disorders.

It's transforming really into this leader in cloud-based connectivity and software digital analytics. I know it's a mouthful, but it's a very interesting moving piece. It's really about connected care. It's really about quality outcomes and saving the government money. That's all that it's about right now as far as healthcare is concerned.

Definitely an interesting space to be in. They are a market leader in this space, believe it or not. It's very interesting for us to watch the chess pieces in this game kind of come out, because maybe ResMed won't be around in a couple of years, maybe next year. Who the heck knows? So, we still remain buyers of ResMed.

Sirtex

Has always been a volatile stock, and we're continuing to move our recommendations around. We did pull it back to a hold as of yesterday. I think it's just getting too hard. You have increased competition.

You have an overhang of their legal battles, and you have a new CEO that has yet to annunciate what exactly he's going to do strategy-wise to drive this company forward and to grow his top line. Now, he told me he's supposed to come out and say this in November, but listen, at this level, I don't have time to wait anymore.

Even though it looks attractive from a 60,000 foot level, trading below a market multiple in a forwarder earnings aspect, I have no confidence at all in my forward earnings estimates and I don't think consensus does as well. So, like I said, right now lock in some profit, watch that company. It could be interesting, but who the heck knows as far as what he's going to come out, the new CEO, and say.

Emerging names

We also mentioned a number of the emerging healthcare names. I put a slide up in July. We mentioned nine names, three of them had disappointed, six are doing well or at least holding. We are particularly interested in the digital healthcare space, so I'll just point you to Volpara and Medibio as two names that look really interesting.

We are reviewing our coverage list, and to that end IDT Australia and Admedus we are recommending that investors move out of those two names.

Video and podcast here

Contributed by Scott Power, Senior Analyst, Healthcare, Life Science and Technology; and Derek Jellinek, Senior Analyst, Healthcare.

You can either watch the presentation or listen to the podcast here: (VIEW LINK)


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