Aus clinical labs/ACL/Healius/HLS

Noting the ACL (small pathology operator) result.

Healius (HLS, a mid-sized pathology operator) had a shocker, with a recent downgrade overhanging the result, which was, overall, quite poor.

ACL, who had proposed a merger with HLS (which was, stunningly, knocked back by the ACCC), tabled their update, in which guidance is also revised.

Even the positive bit of the update, namely that 2H FY24 had started strongly, fizzled out by the end of that sentence.

The issue is highlighted below, pathology episodes are running well below trend, in turn, down because GP attendances (GP’s do the ordering) are down. COVID, and a reduction in bulk billing rates, have seen fewer people go (bulk billing is where medicare cover the bill, rather than you paying an out of pocket).

There was an indexation put through for GP’s in November, which should help the industry, although we are unsure of how quickly it returns to trend.

Sonic, by contrast, is performing reasonably well. They are less vulnerable to the GP attendances shortfall due to their specialist (as opposed to GP) network, and, in any event, are arguably taking share. Pathology is a game where the lowest cost most reliable and efficient operator wins.

So even though HLS and ACL are the number two and three in the sector, it doesn’t look like its enough. They are very cheap, and perhaps the long game of population growth, and maybe some luck around convincing the government to up the amount it pays/reimburses for pathology services, will generate good outcomes.

Arguably, stabilisation in the underlying businesses would be enough, but that will have to come from productivity and cost out initiatives, we think.

The productivity argument sounds most convincing coming from SHL, in our view.

Important Information: This document has been prepared by Aequitas Investment Partners ABN 92 644 165 266 (“Aequitas”, “our”, “we”), a Corporate Authorised Representative (no. 1284389) of C2 Financial Services, (Australian Financial Services Licensee no. 502171), and is for distribution within Australia to wholesale clients and financial advisers only.

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.

General Advice Warning: This document has been prepared without taking into account your objectives, financial situation or needs, and therefore you should consider its appropriateness, having regard to your objectives, financial situation and needs. Before making any decision about whether to acquire a financial product, you should obtain and read the relevant Product Disclosure Statement (PDS) or Investor Directed Portfolio Service Guide (IDPS Guide) and consider talking to a financial adviser.

Taxation warning: Any taxation considerations are general and based on present taxation laws and may be subject to change. Aequitas is not a registered tax (financial) adviser under the Tax Agent Services Act 2009 and investors should seek tax advice from a registered tax agent or a registered tax (financial) adviser if they intend to rely on this information to satisfy the liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law.

Receive our investment insights

Something went wrong. Please check your entries and try again.