Coronavirus Testing Delivers a Transitory Windfall to Healius in Fiscal 2021; FVE Increased by 3%

We’d anticipated that Healius’ ongoing involvement in coronavirus testing would deliver a transitory boost to the no-moat name’s fiscal 2021 earnings. However, year-to-date demand for COVID-19 tests has tracked significantly ahead of our full-year expectations, driving a remarkable 17% sales growth rate in first-quarter fiscal 2021. The ultimate duration and severity of the global pandemic are unknowns, begetting substantial near-term uncertainty as to the precise magnitude and persistence of demand for COVID-19 tests. Nonetheless, we expect elevated levels of COVID-19 testing will remain throughout the remainder of fiscal 2021. Accordingly, we upgrade our fiscal 2021 group sales and EBIT estimates to AUD 1.77 billion and AUD 172 million, respectively. Our revised fiscal 2021 group sales and EBIT forecasts are 5% and 23% greater than our respective prior estimates. The outsize upgrade to fiscal 2021 operating income is the result of the substantial operating leverage that prevails within Healius’ pathology business. While our long-term expectations for Healius remain unchanged, the substantial near-term earnings upgrade drives a 3% increase in our fair value estimate to AUD 3.40 per share. Healius shares screen as overvalued, trading at a circa 10% premium to our revised fair value estimate.