Twelve months ago, there was compelling value in Telstra (ASX:TLS). Since then, its share price has shot up 40% and it may have further to run. In a market where it’s tough to find value, the healthcare business Healius (HLS) could be the next company to outperform.
Healius operates pathology, medical centre, diagnostic imaging and day hospital businesses with good market positions and appealing long-term growth potential.
Not unlike Telstra, Healius has seen painful declines in its profitability and share price as industry conditions changed faster than the company did. At the current price, the market may not be expecting a lot from management’s turnaround efforts.
However, we are inclined to think that management is taking the right steps to reduce costs and improve profitability, and that the eventual results could pleasantly surprise shareholders.
The turnaround process is likely to take some time to play out, but you should also note that major shareholder Jangho is thought to be contemplating a revised takeover approach, having been rebuffed last year at an indicative price of $3.25 a share. We suspect Jangho also sees long-term upside in Healius’s portfolio of businesses and may be willing to pay a premium to secure control over the realisation of that upside. To us, this looks like an interesting long-term story with corporate interest providing some additional option value.