ScoPo’s Powerplays: ASX health stocks drop 0.3% but reporting season gives cause for optimism

ASX health stocks finished down 0.3% in the past five days
Mixed results for the big health companies during reporting season
Morgans upgrades Nanosonics to an Add rating ahead of its half year results

Healthcare and life sciences expert Scott Power, who has been a senior analyst with Morgans Financial for 26 years, explains what the movers and shakers have been doing in health and gives his ASX Powerplays.

Eat your veggies, particularly the purple ones. A new review article from the Food Sciences unit of the University of Turku in Finland has found the purple, red and blue pigments found in fruits, vegetables and tubers called anthocyanins can reduce the risk of type 2 diabetes by affecting energy metabolism, gut microbiota, and inflammation.

According to the review article, acylated anthocyanins are more effective antioxidants than the nonacylated anthocyanins.

Acylated anthocyanins can be found in purple potatoes, purple sweet potatoes, radishes, purple carrots and red cabbages and improve the intestinal barrier that enables absorption of necessary nutrients.

Furthermore, the acylated anthocyanins maintain gut microbiota homeostasis, suppress pro-inflammatory pathways, and modulate glucose and lipid metabolisms.

To markets

And ASX health stocks could do with a nutrient boost this week, looking a bit down despite some positive results coming out of the February reporting season.

At 1.10pm (AEDT) the S&P/ASX 200 healthcare index (ASX:XHJ) was down 0.3% for the past five days, while the benchmark S&P/ASX 200 (ASX:XJO) was down 1.7% for the same period.

While ASX health stocks finished Thursday marginally up for the past five days at ~0.31%, a broad sell-off on Friday saw them finish the week in the red.

“The sell-off at the end of the week was driven by a weak lead from US markets as investors reflect on the continued strength in the US economy and feel more interest rate hikes are coming,” Power said.

“The broader market is a bit up and down but we have had some good results out of the healthcare space.”

He said the sector this week has been supported by the big end of town including Cochlear (ASX:COH), CSL (ASX:CSL) and Sonic Healthcare (ASX:SHL).

Hearing is believing for Cochlear

Hearing solutions giant Cochlear reported better than expected H1 FY23 results, including a 9% increase in sales revenue to a record of $893 million.

Sales revenue was driven by strong growth in Cochlear, up 14% on pcp, and acoustic implant revenue, up 17% on pcp with strong demand for the Cochlear Nucleus 8 Sound Processor, which was launched during the second quarter and recovery in Covid-19 surgery delays.

Morgans sees continued momentum, with FY23 guidance reaffirmed in the range of $290 to $305 million, a 5 to 10% increase on FY22 underlying net profit.

Morgans has increased its 12-month target price from $236.70 to $250.60 with an Add rating.

COH has also announced start of a progressive on market share buy back program, which it said complements the existing dividend policy targeting a 70% payout of underlying net profit.

The board has approved an initial buy back of up to $75 million in shares over the next 12 months, equivalent to half a per cent of COH shares on issue.

The COH share price is up 6.14% in the past five days.

Mixed result for CSL

Power said the blood products giant delivered mixed H1 FY23 results with underlying constant currency (cc) profit a little light, up 9% but in-line revenue growth was strong and up 25%.

CSL reported record plasma collections, up 36%, after two years of Covid disruptions. Its vaccine businesss Seqirus posted high-single digit growth despite reduced immunisation rates, and newly acquired Swiss renal treatments company Vifor was solid, up 15%.

Sales for CSL Behring, which has become a leader in developing and delivering high-quality medicines that treat people with rare and serious diseases, were up 11%.

CSL maintained FY23 NPATA, anticipated to be in the range of ~$2.7 billion to $2.8 billion constant currency.

Morgan’s has increased its 12-month target price from $312.20 to $337.90 with an Add rating maintained.

After a decade CSL CEO Paul Perreault is due to hand over the reins to COO Dr Paul McKenzie from March.

Ansell share price feels pain after cutting FY23 guidance

The Ansell (ASX:ANN) share price tumbled ~8% on Tuesday after profit guidance for the full year was cut by ~8% as customers in its broader healthcare business reduced orders and inventory levels remained still too high in warehouses.

Operating in the personal protective equipment space (PPE) space, ANN’s larger single use medical gloves, surgical suits and PPE business soared during the first two years of the pandemic.

Industrial sales were up 6.4% in cc on the back of an improving economic backdrop, but more than offset by difficult trading across healthcare, down 22% in cc.

ANN posted a 17.2% drop in revenue to $US835 million ($1.2 billion) in H1 FY23.

“That share price had ran up pretty strongly ahead of the result but the result was not that crash hot and outlook commentary would suggest things are pretty challenging,” Power said.

“Ansell has given up a bit of … share price gain from the beginning of the year.”

Morgans has reduced its 12-month target price from $24.14 to $23.32, maintaining a hold rating.

ProMedicus continues strong performance

Health imaging company ProMedicus (ASX:PME) posted a solid H1 FY23 result during the week.

Among key results:

Revenue increased by 28.3% to $56.9 million
Underlying profit before tax improved 30% to $37.2 million
Net profit after tax (NPAT) was 31.5% to $27.2 million
EBIT margin of 66.1%
Half-year dividend up 30% to 13 cents/share

“PME has had an extraordinary run and is a terrific company,” Power said.

“They posted a very good result and its share price has ran up significantly since the beginning of the year.

“They are just a good quality company, winning contracts and best-in-class.”

He said there has been a bit of profit taking with PME recently and down ~3% for the week but it’s on the back of a very strong performance over the past couple of months.

The PME share price is up 14.5% YTD. Morgans maintains a 12-month target price of $61.35 and hold rating for PME.

The COH, SHL, ANN, PME share price today:

Sonic Healthcare margins back at pre-Covid levels

Power’s top pick for last week Sonic Healthcare is up more than 15% this week after reporting its H1 FY23 results.

Power said underlying results were broadly inline with expectations. Slowing Covid-19 testing, down 72%, impinged sales, compressed operating profit margin and constrained operating cash flow.

However, he said the base business (ex-Covid) continues to perform well, with margins at pre-Covid levels, while imaging is also improving.

Clinical Services was softer on lower Covid-19-related services. Importantly, January 2023 saw the base business revenue up 10% on pre-Covid levels, with Australia Pathology jumping 16% on the back of strength in the specialist/hospital referral channels and post-Covid catch-ups.

He said while the lack of FY23 guidance reflects some uncertainty, a recovering base business, along with an improving cost structure and ample liquidity for capital management and M&A, suggests momentum is moving in the right direction.

Morgans have adjusted FY23-25 estimates and rolled forward valuation multiples, with 12-month target price increasing from $34.77 to $37.04 and moving to Add.

Morgans upgrades Nanosonics ahead of result next week

Morgans has upgraded Nanosonics (ASX:NAN) during the week from a hold to an Add, maintaining a 12-month target price of $5.19 ahead of its result half-year result next week.

“The stock has seen some recent volatility and basically gone from $5.20 to $4.50 when we moved our recommendation,” Power said.

“We like the story on the back foot so always looking for a reason to put it back on a Buy and with the share price weakness gave us more than 10% upside to our price target.”

NAN has developed and commercialised the trophon EPR device, a unique automated disinfection technology, which was the first major innovation in disinfection for ultrasound probes in more than 20 years.

The trademarked CORIS device is attempting to solve a complex disinfection problem in removing the biofilm from the flexible endoscope.

Power said he thinks the worst is over for NAN and the market will reward any good news with its half-year result next week.

“What we are looking for is positive commentary around the outlook in terms of how they are seeing the balance of the year,” Power said.

The SHL & NAN share price today:

ScoPo’s Powerplay – Fertility play Monash

Power’s pick of the week is fertility company Monash IVF Group (ASX:MVF), which is also due to report its half-yearly results on Tuesday.

“We are expecting positive commentary coming through and our view is the results will be treated positively by the market,” Power said.

He said Morgans’ view is MVF continues to be well placed to leverage the strong structural demand for IVF services in Australia and internationally.

“The continued innovation and research, growing success rates and attraction of new fertility specialists we believe will drive market share gains,” he said.

The MVF share is up more than 14% YTD. Morgans has a 12-month target price of $1.24 on MVF and an Add rating.

The MVF share price today:

The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees and do not represent the views of Stockhead. Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.

Disclosure: The author held shares in CSL and Sonic Healthcare at the time of writing this article.