Should you buy, hold or sell Healthia shares?
Healthia (HLA) is a diversified health services business offering audiology, physiotherapy, podiatry, optical, occupational therapy, orthopaedics, and more.
The business is well balanced between essential services which are generally pandemic proof and services which are skewed more towards discretionary spending and outdoor activities.
The first aspect affords HLA a great deal of stability should the pandemic continue to impact the local economy by ways of future lockdowns, and the latter provides HLA with significant leverage to the economy's reopening and eventual return to normal.
In particular, services such as physiotherapy and occupational therapy stand to benefit as we get back out in the real world and start to sprain ankles or injure ourselves in the workplace.
Similarly, as we look forward to returning to entertainment venues, we're more likely to upgrade our eyewear to the latest fashions and also spend a greater amount on discretionary items such as audiology and orthotics.
And while we see HLA doing very well in a post-pandemic environment, it is comforting to know that the company has demonstrated strong earnings growth despite the negative impacts of the pandemic on many other healthcare providers.
This robustness of earnings growth makes HLA a very defensive investment, and therefore well suited to a risk-averse long term investor, or as an addition to an SMSF.
In FY21, HLA reported an impressive 91% increase in underlying net profit after tax (NPAT) on a 51% increase in revenues. Analysts often refer to underlying NPAT because it strips out one-off items to compare the performance of typical and ongoing business operations.
In this case, HLA's FY21 NPAT figure removes the benefit of Jobkeeper (+$8 million), and also one-off costs from a number of acquisitions the company completed during the financial year (-$4 million). The FY21 performance was partly achieved via successful integration of 61 newly acquired clinics, impressive organic growth (i.e., from existing sites) of over 9%, and careful cost controls (EBITDA margin increased 99 basis points).
Heading into FY22, HLA now has 212 sites across all states and territories across Australia, and is in a strong position for further growth, both organic and inorganic. The addressable market for HLA's operating segments is around $10 billion, of which their current market share is just 2.5%. More generally, the Australian healthcare services industry experienced growth of 6.2% per annum over the past five years.
So, HLA has a small but growing share of an essential industry that is growing at approximately twice the rate of the broader economy. Note, however, the market for HLA's operating segments is fragmented, characterised by a number of small clinics run by owner-operator physicians.
HLA has a solid track record of acquiring such businesses at significant EBITDA multiple discounts to the HLA Group, and integrating them to unlock group synergies and scale-based cost savings.
HLA management has earmarked another $20 million of capital for acquisitions in FY22, to be funded by the company's strong operating cash flows (+53% to $26 million in FY21), share issuance to clinic owners (thus aligning owners' and the group's interests), and its substantial debt facilities.
HLA is expected to grow earnings per share (EPS) by around 17% per annum out to FY25. The business is currently trading 16 times FY21 earnings (i.e., its PE ratio), and due to the substantial earnings growth expected, this is metric should fall to just 12 times FY25 earnings.
We view the valuation of HLA as very attractive, with the company's shares trading at a significant discount to our fair value target of $2.48. In addition, shareholders will enjoy a fully franked dividend yield of approximately 2.5% per annum.
Given the attractive split of defensive and discretionary-oriented business segments, and management's soundtrack record of integrating newly acquired clinics into the group, we view the execution risk as relatively low compared to other healthcare companies listed on the ASX. As a result, we rate Healthia as a low-risk buy.
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