In this briefing:
- Thyrocare Technologies: All’s Not Well with This Wellness Pathology Leader
- Healthscope (HSO AU): Brookfield Makes Investors Wait, BGH Unlikely to Provide Material Upside
1. Thyrocare Technologies: All’s Not Well with This Wellness Pathology Leader
- Thyrocare Technologies (THYROCAR IN) is the fourth largest pathology chain in India and derives 54% of revenues from the wellness/preventive segment (Rs60bn market growing at 20% Cagr). Margins in wellness are ~2x that of illness segment.
- It is positioned as the lowest price provider in the market with some of its tests priced at 50-70% discount to peers.
- It enjoys the highest operating margin in the industry with excellent control of reagent and manpower costs.
- However, hyper competition in the wellness segment is pushing down pricing. Pullback in adspends is leading to loss of market share over FY18-1HFY19.
- Two-thirds of its capital is invested in the radiology business that does not have economies of scale. Business is loss-making and a drag on return ratios.
- We expect Revenue and PAT Cagr of 15% and 12% respectively over FY18-21 in the face of intensified competition against 24% and 19% respectively delivered over FY14-18.
- Softer growth coupled with utilization of free-cash from the clinical pathology business into the capital intensive and loss-making radiology business will weigh on stock performance. We value the stock at 22.5x FY20 EPS- at 25% discount to the industry leader Dr Lal Pathlabs (DLPL IN) . Our target price is Rs 494 implying 10% downside.
2. Healthscope (HSO AU): Brookfield Makes Investors Wait, BGH Unlikely to Provide Material Upside
Healthscope Ltd (HSO AU), Australia’s second-largest private hospital operator, noted today that Brookfield Asset Management (BAM US) is seeking the necessary internal approvals to submit a binding proposal by 31 January. We believe that Brookfield will come through with its binding proposal as the delays are not due to issues cropping up from the due diligence but due to ongoing financing negotiations with multiple banks.
Notably, there is renewed optimism that BGH-AustralianSuper could materialise with a superior proposal. AustralianSuper has three options available, which lead us to conclude that the floor is Brookfield’s Scheme bid with an option of a minor bump from BGH-AustralianSuper.
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