Volume Declines Across Pathology and Imaging Lead Us to Reduce Healius’ FVE to AUD 2.90

The decline in activity levels across most Australian medical facilities due to deferral of non-urgent care has exceeded our initial expectations. We are now expecting volumes in the last quarter of no-moat Healius’ fiscal 2020 to decline 20% in pathology and 40% in the diagnostic imaging segment. We expect GP services to be less affected as a result of expansion of the government funded telehealth services. Pathology contributes approximately 60% of Healius’ revenue, and imaging and medical centres 20% each. We reduce our fiscal 2020 group revenue forecast to AUD 1.84 billion from AUD 1.94 billion prior, and our net profit forecast to AUD 48 million from AUD 99 million given the company’s high fixed cost base. We expect the volume decline to moderate in the first quarter of fiscal 2021 and growth to return thereafter as elective and routine work returns. But the near-term profit declines, combined with an anticipated equity issuance to shore up the balance sheet, lead us to reduce our fair value estimate to AUD 2.90 from AUD 3.36, and increase our uncertainty rating to very high from high.