Healius Limited (ASX:HLS) (formerly Primary Health Care) operates a suite of health care businesses including pathology, medical centres, diagnostic imaging and day hospitals. These are businesses that should enjoy reliable long-term growth in demand, and Healius generally has good market positions in the markets it operates in. It sounds like it should be a recipe for nicely compounding returns over an extended period of time, right?

However, over the last ten years, returns for shareholders have been disappointing. There are a number of reasons for this, including a poorly-timed and expensive takeover of competitor Symbion Health in early 2008 which weighed on the business for many years, an ATO ruling in relation to the treatment of “practice acquisitions” which dramatically altered the way the business contracts with GPs in its medical centres business, and some market pressures stemming from government initiatives to rein in rising healthcare costs.

While acknowledging the challenges, it is probably fair to suggest that the business has not fully lived up to its potential in the past decade because through much of this period, management was not equal to the challenge. In some cases, it would probably be reasonable to suggest that management was the challenge.

Which brings us to our reasons for being interested in Healius. An otherwise sound business operating below its full potential due to prior management missteps is a business with scope to improve, and we believe the scope for improvement at Healius is considerable.

The current CEO, Malcom Parmenter joined Healius in the middle of 2017, and two years into his tenure, our assessment is that Healius now has the leadership and strategic plan needed to close the performance gap. It is important to note that this turnaround plan – as with any meaningful turnaround plan – will be complex, time consuming and difficult. It will also be costly, with extensive restructuring of the business required, along with large capital outlays needed to bring systems up to date.

However, the early signs appear positive. We were interested through the recent reporting season to learn how the business is progressing, and pleasingly the news is encouraging. The second half of FY2019 demonstrated that cost savings from restructuring are flowing through to the bottom line, and operating KPIs suggest that business improvement initiatives are starting to gain traction.

There is still a long way to go, and plenty of scope for the turnaround to falter. However, at this stage Healius looks to be heading in the right direction, and while the share price strengthened on the back of the result, the market still seems reluctant to price in much of the upside just yet.

Interestingly, Healius also seems to have caught the attention of a number of potential acquirers, with major shareholder, Jangho making an approach last year (quickly rejected) and several private equity groups rumoured to be running the numbers.

While the prospect of takeover is not a strong investment thesis on its own, it certainly adds something to the thesis in this case. We believe that Healius management is on the right track to deliver value, and the possibility of a takeover approach should ensure that progress towards that goal continues at a good rate.