HLS/Spheria

Hi Darren,

HLS dropped as much as 9% at the lows on Friday before recovering to finish down less than 3%, around 4%% below our entry price last week. The drop was a result of Barrenjoey downgrading the stock to sell with a $1.37 price target, a bearish view that is actually aligned with the majority in the market i.e. more analysts have a negative outlook on HLS.

At MM, we don’t mind it when the market is universally bearish on a stock, it means that it’s under owned and ‘less bad news can lead to a decent re-rate higher. The bearish thesis being pushed on HLS is around valuation being too high for the stage of the recovery i.e. it’s on over 40x earnings. However, we think there are several catalysts that will turn the dial for HLS after a horrible few years.

1. Earnings came in better than bearish consensus, and the momentum seems to be ongoing to start FY25 – earnings could easily double by FY26
2. Their balance sheet is currently stretched; however, they are likely to sell their radiology business (soon) for something like ~$700m.
3. A business with too much debt, turns into a net cash business with earnings growth.
4. Assuming that happens, it creates optionality, and we think there will be buy backs as a result.

The downgrade from Barrenjoey on Friday has not changed our view.

chart

Healius Ltd (HLS)

LAST UPDATED 06/09/2024 15:22

Close

chart

Healius Ltd (HLS)

LAST UPDATED 06/09/2024 15:22