Broker Upgrades: Earnings season reveals gems, and Telix and CSL are ones to watch

ASX healthcare sector shows signs of recovery after latest earnings season
Pathology and aged care face ongoing staffing and cost challenges
Jarden highlights Telix Pharma and CSL as key investment picks

Key themes of FY24 reporting season

After the recent FY24 reporting season, some promising signs have emerged in the Australian healthcare sector.

With more consistent revenue and improved margins, it seems like ASX-listed healthcare companies are starting to find their footing.

Cost-cutting measures have helped to bolster margins, but while some firms are regaining pricing power, it’s not a universal trend, says a report from Jarden Research.

In hospitals, the staffing crunch is still real. Nursing shortages have eased slightly but remain a concern.

On the pathology front, operators are feeling the pinch of high fixed costs and declining volumes.

Aged care providers are also wrestling with staffing challenges and new regulations that require more care minutes per resident.

But one of the most prevalent themes this season is that many healthcare companies seem to have bounced back after the tough times of the pandemic.

ResMed (ASX:RMD), for example, saw its profit margins improve significantly, jumping to 59% last quarter despite rising shipping costs. CSL (ASX:CSL) is also on the mend, with its margins up by 1.2%.

However, not everyone is doing as well. The pathology sector is struggling with low patient numbers and losing some of their higher-paying tests, which makes it harder for them to recover.

Amidst all this, investment in technology and AI is ramping up amongst many healthcare names.

Companies like Ramsay Health Care (ASX:RHC) are spending big on digital transformation, while Sonic Healthcare (ASX:SHL) has put itself at the forefront of AI innovation, rolling out platforms for pathology and radiology that could change the game.

Jarden’s two stock picks

Against that backdrop, financial investment and advisory group Jarden has shared two ASX healthcare companies for investors to watch closely.

Telix Pharma (ASX:TLX)

Jarden has given Telix a strong Buy recommendation with a target price of $22.59 (versus current price of $20.35).

Telix develops cutting-edge cancer treatments and imaging technologies. Recently, the company released its financial results for the first half of 2024, and the news was a bit of a mixed bag.

On one hand, it missed its profit target by 18%, mainly because of unexpected costs tied to recent acquisitions. This is pretty common when a company expands, as it takes time for the market to understand the full cost implications.

Despite this hiccup, Telix remains confident and has kept its revenue forecast intact, expecting to pull in between $745 million and $776 million for the year.

A big part of this confidence comes from raising $650m through convertible bonds, which gives it the cash to invest in new research and development projects.

Telix is working hard to grow its market share with Illucix, a product used for imaging cancer. As it gets into more hospitals and clinics, this could really boost revenue.

There’s also a big opportunity in Brazil, says Jarden, where Telix is aiming for approval to sell its products there, which could account for 30-40% of its sales outside the U.S.

Elsewhere, Telix is also expanding the use of its existing products, like Zircaix for kidney diagnostics and Pixclara for brain diagnostics. It has submitted new applications that could significantly increase their market potential.

Finally, Jarden says that Telix is on the lookout for potential mergers and acquisitions to scale up its research and development capabilities and broaden its product range.

CSL (ASX:CSL)

Jarden has given CSL an Overweight rating, with a big 12-month target price $329.62 (versus current price of $289.58).

CSL has seen some ups and downs recently.

In June 2023, expectations were adjusted when CSL said its gross margin would improve only modestly in the upcoming fiscal years. Fast forward to the FY24, and CSL delivered solid numbers, hitting the high end of its profit guidance.

The story for CSL is really its Behring division, which develops and manufactures therapies derived from human blood plasma.

Jarden says there’s a significant opportunity for Behring to boost its gross margin by 830 basis points (8.3%), thanks to its projected revenue of $13.5 billion.

This potential is expected to drive an impressive compound annual growth rate of 14.5% for the company over the next four years.

Several factors are helping CSL on this path, Jarden continues.

Lower prices, reduced fees for donors, and the rollout of new technologies like the Rika plasmapheresis device are all key players.

The Rika device is set to be completed soon and should help lower costs by increasing plasma yield while speeding up patient processing.

There’s also excitement around new high-margin products, such as Hemgenix and Garadacimab, which could further boost profits.

Confidence is growing that CSL can return to pre-Covid margin level, says Jarden.

Currently, CSL is conducting stability studies for new manufacturing processes, and initial data looks promising, suggesting it could push margins above 60%.

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