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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This document is based on information available at the time of publishing, information which we believe is correct and any opinions, conclusions or forecasts are reasonably held or made as at the time of its compilation, but no warranty is made as to its accuracy, reliability or completeness. To the extent permitted by law, neither Aequitas nor any of its affiliates accept liability to any person for loss or damage arising from the use of the information herein.

Please note that past performance is not a reliable indicator of future performance.

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