HSO is in talks with PE to sell its pathology business

Healthscope (HSO, Add, Price Target A$3.22) - Speculation in Street Talk this morning suggests HSO is in talks with PE to sell its pathology business and may consider opening up a data room to increase competitive bidding for the asset. As the pathology division has had its fair share of ups-n-downs (FY11-14A EBITDA CAGR 5%; FY14-17E EBITDA CAGR 7.5%) and we believe is viewed as non-core (c20% of total earnings; 13% international pathology; 6% domestic pathology), the possibility of jettisoning the business (we estimate a A$700m+ sale price) is likely to be viewed positively by the market and would provide fodder for a re-rate closer to pure-play hospital peer Ramsay Health Care (RHC; Fwd PE 28.5x vs HSO PE 25.5x). We view recent share weakness (last 3mos -6% vs RHC +4% vs ASX200 -4%) and >10% PE differential to RHC as unjustified and a great buying opportunity.