Medical Centres Drag on Healius Turnaround but Up for Sale; Lowering FVE to AUD 3.36

The decline in no-moat Healius’ medical centres business in the first half was unexpected. While we had not fully factored in management’s prior GP recruitment and profitability targets, the weak results and management conceding the medical turnaround is proving more challenging than anticipated has caused us to revise our outlook. Consequently, we decrease our fair value estimate for Healius to AUD 3.36 from AUD 3.50 per share. Our valuation includes a 25% probability the private equity offer at AUD 3.40 per share is successful, although this has little impact given it’s close to our standalone AUD 3.34 valuation. Since the board declined to present a take-out offer, at a slightly lower AUD 3.25 per share, in January 2019 and referenced a potential sale of the medical centres business-- an estimated 10% of earnings--we place a relatively low likelihood on the deal going through.