The enthusiasm surrounding the Healthscope float has turned the spotlight back on the healthcare sector. Shares in the Healthscope IPO were priced at $2.10 and the stock closed at $2.24 on August 6. The healthcare sector is diverse, offering strong growth and defensive plays descending to the riskier start-ups in the junior biotechnology sector.
As Ken Bloomfield, principal of Financial Clarity, says: “The healthcare sector has some great demographic and structural tailwinds for investors over the next 10 years.” But analysts say stock selection is vital and investors need to distinguish between the likely performers going forward and the strugglers.
“Investors have to be a little cautious not to lump all the stocks in the sector together,” Bloomfield says. “The risk profiles of stocks vary greatly. For example, the biotech and early tech sectors of healthcare is one of the most volatile and unpredictable on the ASX. Then there’s annuity style service businesses, such as Primary Health Care, which already has established infrastructure and preferred provider status, with the tailwind of an ageing population.”
James Samson, of Lincoln Indicators, says the Healthscope listing and a possible Medibank Private IPO, among others, could provide buying opportunities for well established listed companies. “As investor fervour for new listings in the sector takes centre stage, money flows and fund allocations to new businesses may see funds exit old established businesses,” he says. “While new floats may appear exciting to investors, the healthcare sector houses some of the most consistent and stable growth companies on the ASX.”
Today, analysts present their best value healthcare sector choices on the ASX.
Sirtex Medical (SRX)
Provides liver cancer treatment, known as the SIR-Spheres. Samson says strong growth in dosage sales in recent quarters is a response to the treatment gaining more acceptance among medical prescribers. In the quarter to June 30, Samson says sales rose 27 per cent. He says a further international study is examining whether chemotherapy combined with selective internal radiation therapy, using SIR-Spheres microspheres, would be more effective in treating liver metastases from primary colorectal cancer rather than relying on chemotherapy alone. “This is an exciting development and we expect results to be released to the market in early 2015,” he says. “Positive results could be the catalyst for increasing dosage sales of SIR-Spheres.”
Sirtex Medical posted a 43.6 per cent increase in half year net profit after tax to $11.2 million. Full year results will be posted on August 20.
Capitol Health (CAJ)
Samson says Capitol Health has enjoyed significant growth from offering a wide range of services, including general x-ray, magnetic resonance imaging (MRI), CT Scans, ultrasound and mammography, mostly to the Victorian market. “Growth potential should be realised through market share gains, improving operating margins and favourable changes to MRI licence regulations in coming years,” Samson says. “Additionally, the company has recently partnered with a 3D medical imaging business to keep it at the forefront of medical diagnostic imagery. Capitol Health offers investors exposure to a profitable growing business in a strong sector. Financial health is strong.”
First half net profit after tax was up 110 per cent to $3 million, Samson says. It will report full year results on August 20.
CSL Limited (CSL)
Joshua Stega, of JAS Wealth, says CSL’s share price in the past 12 months hasn’t matched the strong performance in 2012 and 2013. “We maintain that CSL’s strong track record in unlocking value in its research and development portfolio will remain key to valuation upside,” Stega says. “But, in my view, the market is divided on whether CSL spends a little too much on R&D. I don’t think it does. But I believe CSL’s increasing R&D spending is a reason why the heat came out of the share price.”
According to CSL, it invested $US427 million in R&D in 2012/13 compared to $US368 million in 2011/12.
Stega says the blood products group has the potential to expand margins, and new specialty products should drive up sales. Stega’s share price target is $74.48. The shares closed at $64.41 on August 6, which Stega believes is a “good entry point” for a company operating in 27 countries and generating revenue of $US2.691 billion for the six months to December 2013, a 5 per cent increase on the prior corresponding period. Stega expects the company to meet full year guidance when it reports on August 13.
Makes medical equipment for treating sleep disordered breathing and other respiratory disorders. “In a recent report, we were encouraged to see RMD had implemented discount pricing to capture lost market share, mostly in the US,” Stega says. “As an investor in RMD, our focus shifts to upcoming sleep apnea product launches, which we expect to generate higher sales volumes and profits. We argue buying at current levels should prove a good entry point for long term healthcare investors.”
The shares closed at $5.30 on August 6.
Primary Health Care (PRY)
Operates 87 medical centres across Australia and is also involved in pathology and diagnostic imaging. Patients and medical practitioners prefer the integrated service model of the medical centre, according to Ken Bloomfield. He says establishing medical centres is expensive and it takes many years to recoup the outlay, including the high costs of medical equipment. “As Primary Health Care becomes a more mature business, the cash flow from long established centres covers the cost of establishing new ones,” Bloomfield says. “That’s a reason why we like this company.” Recently trading on about 13 times 2015 earnings and a fully franked dividend yield of about 4.6 per cent, Bloomfield says that Primary Health Care offers good value.
NIB Holdings (NHF)
Bloomfield believes an ageing population and government financial constraints paints a bright outlook for health insurance providers. “With increasingly stretched fiscal budgets, we believe governments will slowly lay off some of its healthcare burden to the private sector,” he says. Bloomfield says NIB is strategically directing efforts at signing up younger members. This should pay off in future, as members tend to stick with health insurance providers. “The company is well managed and its New Zealand acquisition in 2013 should prove to be a shrewd move,” he says.
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