HLS delivered a disappointing update at last week’s AGM, saying that 1H25 pathology earnings will essentially be inline with the same period last year equating to guidance materially below consensus, i.e. they implied $4m EBIT relative to current consensus of $25m.
The outcome was underwhelming, given revenue was actually up 5.9% YTD, implying issues on the costs side. To that end, HLS essentially said they spent money to grow while labour cost pressures and “other inflationary increases” were to blame – very vague! The key to the HLS story and why we originally bought the stock was the potential for HLS to sell their imaging business called Lumus, and in doing so, de-gear their over geared balance sheet, allowing them to rejuvenate their pathology operation from a position of strength.
They ultimately got a very strong price for Lumus, and the funds will be used to pay down debt, plus in our view, return something like ~$400m to shareholders via a special dividend to take advantage of the ~$160m worth of franking credits on the balance sheet. Instead of providing a clear road map for this at their AGM, they said all will be revealed at an investor day in Q1, including its plan to improve Pathology.
It’s now difficult to identify a catalyst between now and Q1’s investor day to see the stock recover. While we think the downside is limited, we also think the upside fits into the same box.
- We bought HLS, believing at the time that it was a cheap “turnaround story.” With several catalysts to address the markets concerns at the time, however, this has proven wrong.
- We cannot see HLS advancing back above $1.50 unless we see fresh news, or corporate action.
- We are inclined to use HLS as a funding vehicle if we need it.
