Investment Ideas

An opportunity in Healthcare? Follow the process.

Exposure to the Healthcare sector is a long running theme with investors for the past decade, with it’s ever growing importance for the aging population. It is a sector that has an attractive growth profile, and contains a number of high quality businesses. For these very reasons, investors often feel that they have ‘missed the boat’ when it comes to getting set on these positions, as the sector often trades at a high multiple compared to the broader market.

The reflation pivot

However, the pivot in global markets since November 2020 which saw the ‘reflation trade’ take hold (which we highlighted for members in the Portfolio Strategy Update section), has seen some of the more defensive sectors such as Healthcare come off as cyclical sectors took the lead.

Whilst many other sectors have done well since November, Healthcare has done the opposite. There are two main factors at play here. Firstly, the rotation into those more cyclical sectors as mentioned above. The other is the movement of the Aussie dollar. Healthcare has a lot of offshore earnings and exposure to the $AUD, and hence movements in the currency can affect short term trends. Therefore, the move up in the $AUD since November has played its part.

Here is a chart of the Australian Healthcare sector over the past year (sector charts update every day in our ASX Sector Summary in the members section):

We can see the downtrend since November, bottoming in early March (the $AUD peaked in late February). Since then, we have this uptrend developing again as bargain hunters have moved in and buyers have returned.

Value emerges

With this sort of a move (around -17% peak to trough) it would suggest there may be some value in some of these individual, high quality companies. Lets look at the ASX 200 Research tables and see how they are looking in terms of their price to fair value.

The table below is a screenshot of our ASX 200 Research table in the members area, where we have used the filter to screen for only Healthcare stocks with a market cap of over $4 billion. We get 8 results. We then click the Price to Value Ratio heading to list these in order of value (the lower the number the better value):

As we can see, Resmed and CSL, two historical investor favourites, are at the top of the list, showing 15% and 14% discounts to fair value. If a member then clicks on the Report icon for each stock to look into these further, here is what we find for the ‘last major event’ for each one:

Resmed: In Jan’21 RMD reported a strong 1H21 result underpinned by higher than anticipated Mask & Accessories revenue, particular in the RoW segment. Revenue increased 9% vs pcp to $800m, whilst an improved gross margin up 20bps to 59.9% saw NPAT increase 16%. Revenue in Europe, Asia and other markets grew by 10%, driven by device and mask sales, whilst SG&A fell 3% as COVID-19 related savings in travel and other cost management initiatives flowed through. We maintain our bullish valuation as better than expected Masks sales more than offset our higher AUD/USD, with RMD noting that COVID-19 headwinds should ease through FY21.

CSL: In Feb’21 CSL reported a resilient 1H21 result with plasma collection headwinds related to COVID-19 compensated by a very strong performance from Seqirus, with revenue up 38% and a 93% uplift in Albuim sales following distribution changes in China. Sales of Hizentra were solid, up 19%, reflecting the benefits of home administration, whilst intravenously injected Privigen saw modest growth on pandemic related travel restrictions and supply constraints. Whilst NPAT grew an impressive 44% to $1,810m, FY21 guidance between $2,170-2,265m implies a softer H2 which may be conservative. We maintain our val, expecting CSL to re-establish plasma supply over the US summer with industry leading collection centers.

Whilst we can never fully foretell the future, we can see from these results above that both companies appear to be doing well, and our stock analysts are comfortable with their valuation given the information that is known. Short term movements will still certainly be influenced by the Aussie dollar (which as I write has moved higher again) and other factors, but for medium to longer term investors, these companies appear to be providing some value here. Of course, they are not the only ones on the list (for example some investors may prefer a higher Forecast EPS (earnings-per-share)) and members can explore other choices, but this at least outlines the steps involved.

It’s a process

The above work flow is a classic way to use the research that The SMSF Investor provides to find opportunities:

  1. The Portfolio Strategy Update summarises what is going on at the macro level, and identifies issues such as the ‘reflation’ economic regime becoming predominant
  2. The ASX Sector Summary then enables you to visually identify how the macro regime is affecting the sectors, when a sector has become out of favour, and also when it is potentially bottoming.
  3. The ASX 200 Research Tables then enable you to filter the sector you have identified, and look for value at the individual stock level
  4. And finally, the Viewpoint Reports enable you to look at more detail on the company you have identified, including a summary of the latest major event to get an idea of how it is going, and how our stock analysts are valuing it.

Whilst there is no ‘perfect’ way to invest, having a step-by-step process like this (which marries the top down macro with the bottom up micro in a linear way) greatly assists investors to reduce the risk of being in the ‘wrong place at the wrong time’, and to find the opportunities when they appear.


Author: Graham Parkes

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