HLS has de-rated a lot, both before and subsequently post the recent downgrade. The key driver: pathology, having materially over-earned relative to trend, is now in the process of mean-reverting, as COVID fades (specifically, the bits that generate revenue for HLS).
And from an earnings perspective, pathology is entirely the bit that matters. The GP centre strategy never made much money, was capital intensive, and eventually they gave up on it. For that matter, diagnostic imaging is also pretty capital intensive and doesn’t scale in the same way that pathology does.
Now the problem with a business that’s overearning is that it makes ascertaining what multiple you “should” pay quite difficult.
A forward-looking EV/EBITDA of sub 6x would be quite attractive for a hub and spoke type business, but circa 9x at “through the cycle” isn’t – you might as well just buy SHL and be done with it.
For the most part, we don’t think the 14% FCF yield will be realised, and a number half to a third of that is more likely (based on even a casual inspection of historical OCF, shown below) and as such, with that normalisation ahead of us, we keep HLS on the side-lines, for now.
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