Scopo's powerplays: Investors love a result, until they don't

Healthcare and life sciences expert Scott Power, who has been a senior analyst with Morgans Financial for 24 years, explains what the movers and shakers have been doing in health and gives his ASX powerplays.

Themes of the week

Two out of three ain’t bad, and the third wasn’t all bad either even if investors decided it was a sell signal.

Last week, Scott Power was looking for share market bounces following financial results from EBOS (ASX:EBO), Virtus Health (ASX:VRT) and ProMedicus (ASX:PME), thanks to either a reputation for delivering on conservative guidance or playing the ice queen with investors.

EBOS, Australia’s largest pharmaceutical wholesaler into pharmacies and hospitals, rarely disappoints when reporting and did not this year either.

“They delivered a cracking result. They were one of the few companies to maintain guidance and continued to pay dividends,” Power said.

“It was hard to fault any of their metrics. Profit was up 18 per cent, they guided for continued growth into fiscal 2021, and reconfirmed a dividend payout ratio of a minimum of 60 per cent of after tax profit.

“That’s a yield of around 3 per cent which — given blue chips are cutting dividends left, right and centre — is sensational.”

EBOS stock rallied nicely after the news.

Number two was Virtus, a recent Power favourite.

“While there were plenty of write-offs, the balance sheet is in reasonable shape so there will be no capital raising,” he said.

“Profit of $22.5m was much lower than our forecast of $27.6m but a solid two months of trading to the end of July is a big positive.

“It had a terrific share price performance to around $3.30 and I think using some of the tech and efficiencies they’ve gained, and a new CEO in Kate Munnings, they have good potential.”

The third pick, Pro Medicus, reported on Wednesday and the stock promptly sank over 8 per cent.

The report wasn’t bad and Power was mystified as to why it dropped.

“It hit our profit expectations and the conference call was positive — I couldn’t see any issues,” he said.

“The key selling points for them is the pipeline of contracted revenue worth in excess of $210m, and the fact that radiology volumes are returning to pre-COVID-19 levels.”

What’s up and what’s down

It’s been an “extraordinary” week for the largest health companies as well as the smallest.

“Shares in the largest names in healthcare were gyrating wildly. CSL (ASX:CSL), which is Australian’s largest company, moved 15 per cent this week. Cochlear (ASX:COH) moved 12.4 per cent between it’s weekly low and high. Just extraordinary,” Power said.

“The macro is there’s more positive news around vaccines, still a lot of government stimulus about, and zero rates.

“On a more company specific basis, it’s reporting season so there’s more news around how companies have been affected during the health crisis, and the reality is that it hasn’t been as bad as people have feared.

“The NASDAQ reached an all time high on Wednesday and the ASX has recovered virtually all lost ground since the end of March.”

Among the smaller companies, Medical Developments International (ASX:MVP) investors responded positively to its move to buy back the Europe distribution rights for its non-opioid painkiller Penthrox.

The Europe Penthrox distributor is reorganising its business and while it invested strongly in putting sales infrastructure in place for the drug, it has now re-prioritised that product so MVP bought the rights back for €8m ($13.2m), which it sold in 2015 for $54m.

Power says Nanosonics (ASX:NAN) is the most successful example of a company doing something similar. It had an exclusive deal with GE Healthcare which in its early days was less than successful.

That was scaled back to a non-exclusive deal, Nanosonics put its own sales staff in place, and it hasn’t looked back.

Power’s picks

The coming week is another one for anticipated result-based bounces.

Monash IVF (ASX:MFH) is reporting on Monday and Power expects the same themes around pent-up demand for IVF and the impact of remote consults to benefit them too.

“The IVF data point we’re looking for comes at the end August when Medicare publishes the cycle numbers for the month,” he said.

“We expect those will be positive, with fresh cycles of about 5000 for the month, or similar to June.”

Nanosonics is also on Power’s watchlist.

“Everybody knows the profit will be weak and there will be little growth on last year, but the key point we’re looking for is commentary around the release of their second product,” he said.

“They’ve said they expect to launch the second product in calendar 2021. If they’re vague or there’s any slippage on that, the shares will be punished, and vice versa if they confirm the launch date.”

Sleep apnoea company Somnomed (ASX:SOM) has already pre-released its results but Power thinks its commentary around the state of the business will be good.

“Anyone providing s stable set of words is getting rewarded,” he said.

The views, information, or opinions expressed in the interview in this article are solely those of the interviewee and do not represent the views of Stockhead.

Stockhead has not provided, endorsed or otherwise assumed responsibility for any financial product advice contained in this article.