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In the share market rout of 2020, one group has held up: the S&P/ASX 200 Health Care Sector finished the March quarter in positive territory, rising by 2.1% – the only one of the S&P/ASX 200 sectors to finish the quarter in the green.
That gave the sector a 37.8% rise for the 12 months to 31 March.
That’s great for the sector, but it also shoots a warning signal – that the healthcare stocks are being seen as a relatively safe haven. That could be a worry in terms of valuation – but quite a few of the healthcare stocks have very sound long-term growth prospects in a post-COVID-19 world.
Here are four constituents of the S&P/ASX 200 Health Care Index that fit this bill:
Market capitalisation: $138.1 Billion
March updated price target: $308.60
FY19 Historic P/E: 50.3 times
FY20 Forward P/E: 40.2 times
Australia’s heavyweight biotech has been a go-to stock in the Crash, gaining 13.4% for the first quarter (although it has retreated from a pre-crash February high of $341). CSL is one of the best-quality stocks on the Australian market: its CSL Behring operation is the leading plasma therapies company in the world, and is not expecting any slowdown in demand for its immunoglobulin or albumin products in the wake of the Covid-19 outbreak, beyond what the company has already reported, which is a one-off impact from a shift to a direct distribution model in China.
CSL has benefited from a shortage of immunoglobulin in Western markets, particularly the US, as demand for the product has soared as its applications widen and doctors understand its uses better. CSL has invested heavily in plasma collection centres and has been able to open plasma collection centres faster than its main competitors, Spanish group Grifols and Japanese multi-national Takeda. CSL’s other core business, Seqirus, is the second biggest influenza vaccines company globally. The development pipelines of both businesses will keep CSL at the forefront of their fields, and give the stock major long-term potential.
CSL is not directly engaged in the search for a coronavirus vaccine, but has offered to help governments around the world by lending its expertise, technologies and facilities to support rapid, scaled development of coronavirus vaccines and treatments.
I think CSL is a strong long-term buy. The most bullish brokers on the stock are UBS, which has a price target of $342.00, and Credit Suisse, which sees CSL at $329.00. Tempering that, Morgan Stanley has a target price of $260.00.
Market capitalisation: $11.5 Billion
Analysts’ consensus target price: $65.94 (Thomson Reuters)
FY19 Historic P/E: 20.2 times
FY20 Forward P/E: 20.9 times
Ramsay Health Care, the nation’s largest private hospitals operator and one of the largest private healthcare providers in the world, has been affected by the Covid-19 Crash: it has lost 21% this year, and last month, the company retracted the guidance it had given the market for full-year earnings growth. Ramsay is one of the largest and most diverse private healthcare companies in the world, with 480 facilities across Australia, France, the United Kingdom, Sweden, Norway, Denmark, Germany, Italy, Malaysia, Indonesia and Hong Kong. It is being directly affected by the virus, making its hospital infrastructure available for government use during the pandemic, and taking on elective surgeries to ease pressure on public hospitals. Because of the circumstances is not really possible to accurately predict the impact on Ramsay’s earnings over the short term, but in the long run, Ramsay owns the kind of medical infrastructure that will continue to be highly valuable: from primary care to complex surgery, as well mental health care and rehabilitation. At the scale that it is, with all of its purchasing power, Ramsay’s is a healthcare portfolio that should only have enhanced value on the other side of Covid-19.
Market capitalisation: $1.7 Billion
FY19 Historic P/E: 144.3 times
FY 20 Forward P/E: 141.5 times
March updated target price: (Morgans) $6.97
Biotech star Nanosonics has a business speciality that should be jumping off the search screens at this time: Infection prevention. Nanosonics has effectively disrupted the way that ultrasound probes are disinfected between use: where traditional disinfectant methods use corrosive chemicals that are both inefficient and potentially hazardous to the user, Nanosonics’ product trophon is a biocide that is much more efficient and environmentally friendly: the only by-products are oxygen and water, meaning no exposure to toxic chemicals, and no hazardous by-products or waste to dispose of afterwards.
This is not directly related to Covid-19 and viruses in general, but products that ensure that patients are protected from the risk of cross-contamination or infection are front-of-mind for a lot of investors at present.
In the first half of the financial year, Nanosonics grew its global installed base of trophon systems by 17%, to 22,500 units. The system is now in 21 countries, although North America contributes more than 90% of revenue. Consumables (used to operate trophon) revenue rose by 40% to $34.1 million, as total sales grew by 19% to reach a record of $48.5 million.
Where Covid-19 is affecting Nanosonics’ business is that hospitals have more important issues on their hands at the moment: Nanosonics can’t get its product in front of decision-makers to have them buy it. This is delaying the roll-out of trophon; and the company says the potential for COVID-19 to impact trophon consumables sales in Q4 FY20 is “uncertain at this stage.”
A blue-sky factor that the market is awaiting is Nanosonics’ next “new innovative platform technology,” which it says is being designed to address a “major unmet need in infection prevention today.” Like trophon, this would involve both capital equipment and consumables: Nanosonics says the new product would, if successful, be “similar in financial opportunity to trophon.”
If you can overlook the P/E, which is out of all normal ranges, Nanosonics looks a buy with the second product coming along.
Market capitalisation: $2.1 Billion
March updated target price: $30.24 (FN Arena)
FY19 Historic P/E: 98 times
FY20 Forward P/E: 89 times
Imaging technology provider Pro Medicus has benefited from the move of radiology imaging to the cloud: it provides a range of IT solutions to its users, which are hospitals, imaging centres, and health care groups. Pro Medicus has built a competitive advantage based around its ‘Visage’ imaging software, which allows radiologists to view reports and X-rays on their mobile devices.
The crucial attribute of the software is that enables easy transfer over mobile devices by streaming large, high-resolution files direct, rather than needing to compress and send them. Pro Medicus has announced plans to expand into other medical imaging fields, including cardiology and ophthalmology.
The company is well-placed, with no debt, a growing cash balance, high margins and return on equity. About 80% of revenue comes from the North American market, in which Pro Medicus grew revenue by 43% in the December 2019 half-year. Down from a February high of $27.30, PME could be a good buy at these levels: investors have to weigh-up the huge P/E against the fact that much of the earnings are underpinned by long-term contracts, and there is reasonable expectation that the cardiology and ophthalmology expansions could be just as successful as the radiology base.