ScoPo’s Powerplays: Case of courage under fire for ASX health stocks
Health & Biotech
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In this week’s ScoPo’s Powerplays, healthcare and life sciences expert Scott Power, who has been a senior analyst with Morgans Financial for 24 years, examines the turbulent start to 2022 for ASX health stocks and what could lie ahead as geopolitical and economic uncertainty weigh heavily on global markets.
Scott Power sat at his desk working early on Thursday afternoon when, like that of many Australians, his phone and computer started buzzing with alerts that Russia had commenced a full scale invasion of Ukraine.
When attacks on Ukraine’s capital Kyiv were reported amid a series of separate attacks across the country, the veteran analyst turned his attention to equity markets as investors braced for all out war between Russia and Ukraine.
At the close of trade the S&P/ASX 200 index had tumbled ~3% or 215 points to 6990.6 points with ~$73 billion wiped from the local bourse, in a collapse exacerbated by the Big Australian BHP also going ex-dividend.
When the share price of the biggest company by market cap (and by a long way too) on the ASX tumbles, it certainly is not going alone with the collateral damage stretching far and wide.
Overnight, Australian investors woke to the unexpected news US markets had rose, with all three major benchmarks surging, led by tech stocks – the S&P 500 by 1.50%, the Nasdaq by 3.34% and the Dow by 0.28%.
But in Europe, all major indexes weren’t so fortunate with the Stoxx 500, FTSE, and CAC 40 losing ~4% each. The Russian Moex index plunged 33% while the ruble plunged to its record low.
On Friday morning the ASX opened higher, following US leads but not enough to pare back Thursday’s heavy losses.
The ASX health sector has felt the brunt of a broader selloff in equity markets in what has been a challenging start to 2022. The sector is down ~11.4% since January 1, compared to the broader market at 5.2%.
On Friday morning healthcare was up slightly ~0.37% for the five days after a Friday morning rally, compared to the broader market, which was down ~2.68%.
“Despite what was a pretty good reporting season for most of the healthcare companies the sector continues to be under pressure,” Power said.
As of Friday morning, pathology provider Sonic Healthcare (ASX:SHL) was down 4.7% to $35.52 for the week, despite reporting relatively strong H1 FY22 results underpinned by COVID-19 testing. Its testing volumes are forecast to retreat over next year with Morgans downgrading the stock to a hold.
“It will be hard to replicate the testing volumes but it’s being sold off from around $46 in late December so it’s still a massive sell-off for a company that’s posted strong results,” Power said.
Hearing solutions giant Cochlear (ASX:COH) had some bright news among the clouds with its share price rocketing ~11.75% this week to ~$214.90 on solid half yearly results.
The COVID-19 pandemic has hit Cochlear hard since the start of 2020 through postponement or stopping of elective surgeries which included installing its implants.
“As elective surgery gets back into full swing Cochlear is a real beneficiary,” Power said.
Pathology company Healius (ASX:HLS) posted a 44.2% surge in revenue in the half-year to December to $1.34 billion, while more than trebling its net profit.
Healius was a beneficiary of a COVID-19 testing boom. But its positive results weren’t enough to see its share price not dip 1.58% to $4.37 this past week.
However, despite the positive result Nanosonics’ share price still tumbled this week ~12.88% to $3.99.
“I didn’t see any real issues in its results but the market sold that one down so it an example of where some of these companies at the moment just can not take a trick and selling creates selling,” Power said.
Cancer cell therapy business Chimeric (ASX: CHM) this week opened a a non-renounceable entitlement offer for ~106.5 million fully paid ordinary shares with the intention of raising more than $18 million before costs.
The equity raise will involve an accelerated 1 for 3.15 offer, at $0.17 per share, a 15% discount to the closing price of Chimeric shares on February 18, 2022. The share price is currently ~.15 cents.
Medical technology company Next Science (ASX:NXS) has successfully completed a two tranche institutional placement to raise $10 million.
Next Science will issue ~11.1 million new shares to institutional and sophisticated investors at 90 cents.
This price represents a 12.6 per cent discount to Next Science’s closing price on February 22 of $1.03 and a 15.5 per cent discount to the five-day volume-weighted average price of $1.07.
Phase one is raising $6 million while phase two, which is subject to shareholder approval, consists of a $4 million commitment from major shareholder, Lang Walker.
Next Science is also undertaking a share purchase plan (SPP) to raise up to an additional $5 million.
“The point is that money is still being raised, supported by existing shareholders to keep these companies moving forward,” Power said.
Next Science has not been spared from the broad selloff since it came out of a trading halt it entered on February 23, with its share price plunging ~15.35% in the past week to 91 cents.
“The market is pretty savage when they back come on the market when they’ve raised the money.”
Diagnostics company Genetic Signatures (ASX:GSS) share price was $1.28 after its revenue went up $22m and NPAT up $5m in H1 FY22, the beneficiary of COVID-19 testing.
Clinuvel Pharmaceuticals (ASX:CUV) saw its share price come under selling pressure and fall 13.34% to $19.10, despite reporting revenue up 57% to $25m in H1 FY22.
“Good results are not necessarily translating into share price rises; in fact, in most instances they are being met by selling,” Power said.
In these tumultuous times, Power said this week he was hard pressed to single out one company as a stock of the week.
“These sort of turbulent times are a great opportunity to pick up good quality companies that have things like good pricing power, a bit of a competitive moat and clear growth plan,” he said.
“This is a terrific opportunity to pick up and build your porfolio for the next five years.”
Power said the smaller health companies on the ASX will continue to feel the pinch of volatile markets. He said companies, which in more bullish times may have seen their share price rise this week instead saw them fall.
“They’ve been smoked mercilessly and absolutely crucified and the likes of Volpara (ASX: VHT), Impedimed (ASX:IPD) and Mach 7 (ASX:M7T) are now trading on up to 24-month lows but are performing well and in really strong positions to see their share prices rally,” he said.
“When the dust settles – and this is where you need a bit of courage and I put myself in that category – you need to be looking at the quality companies and use it as an opportunity to buy a half or quarter position.”
On that note, Power did say watch health imaging company Mach 7, which is due to report its H1 FY22 result on Monday with Morgans forecasting revenue of $14m and EBITDA of $1.2m.
“They are winning contracts and moving into a growth phase and offer value compare to some of their peers,” he said.
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