Digital Automation And Genomics Expansion Will Support A Stronger Long Term Pathology Business

Catalysts

About Healius

Healius is an Australian healthcare company focused on pathology and specialty diagnostics services, including genomics and clinical trials support.

What are the underlying business or industry changes driving this perspective?

• Acceleration in high complexity testing such as genomics, oncology profiling and reproductive health, which is already growing above 30 percent annually, should structurally lift average fee per episode and support revenue growth that is faster than core volumes.
• Digital enablement across referrer portals, e-referrals, online bookings and patient portals is improving convenience and service levels. This should support referrer retention, expand the specialist customer base and underpin steady top line growth.
• Labor optimization using data driven rostering, regional lab redesign and AI supported scheduling is expected to offset wage inflation, keeping labor costs broadly flat and supporting net margin expansion as revenue grows.
• Automation and lab modernization in microbiology and anatomical pathology, including digital reporting and AI decision support, should reduce turnaround times and unit costs. This would support higher throughput, improved competitiveness and better EBIT margins.
• Disciplined cost reduction in support functions, together with a simpler pathology only business model and conservative capital management, is expected to enhance operating leverage so that incremental revenue growth converts more fully to earnings and cash flow.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Healius's revenue will grow by 4.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from -41.9% today to 2.6% in 3 years time.
• Analysts expect earnings to reach A$40.2 million (and earnings per share of A$0.05) by about December 2028, up from A$-563.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$72.7 million in earnings, and the most bearish expecting A$29.6 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 20.1x on those 2028 earnings, up from -1.3x today. This future PE is lower than the current PE for the AU Healthcare industry at 49.1x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.19%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• If the T27 strategy and associated digital and automation initiatives fail to deliver the targeted high single digit EBIT margins by June 2027, the market may reassess Healius as a structurally low margin operator in a competitive industry. This would pressure earnings and could drive the share price lower through a de rating of valuation multiples and weaker net profit.
• Sustained weakness or further softening in core pathology volumes, particularly if GP and specialist attendance growth slows or B12 and urine eligibility changes have a larger than expected impact, would undermine the current revenue growth trajectory and could prevent operating leverage from materializing. This would put ongoing pressure on revenue and EBIT margins.
• Labor cost inflation, including outcomes from the Fair Work Commission decision on phlebotomists and enterprise bargaining agreement increases, may outpace the benefits of labor optimization and AI supported rostering. This could result in higher than planned staff expenses and constrain margin expansion, which would dampen earnings growth and limit cash generation.
• Regulatory and funding risk, such as further changes in Medicare benefits schedule rules, indexation shortfalls or additional shifts toward eligibility based testing, could compress reimbursement for core tests and increase the reliance on non rebatable and private billing volumes. This could introduce demand elasticity that may weigh on both revenue growth and net margins.
• Execution or market risks in high growth segments like genomics, oncology profiling and clinical trials, including capacity constraints, heightened competition or geopolitical disruptions similar to those that affected Agilex, could slow the currently strong double digit growth rates and remove a key structural driver of higher average fees. This would limit revenue mix improvement and the uplift in overall earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of A$0.9 for Healius based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$1.65, and the most bearish reporting a price target of just A$0.6.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be A$1.5 billion, earnings will come to A$40.2 million, and it would be trading on a PE ratio of 20.1x, assuming you use a discount rate of 7.2%.
  
• Given the current share price of A$0.99, the analyst price target of A$0.9 is 10.2% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.