Healisu (HLS) – Bumpy path to profitability

Healius Limited provides medical laboratory and pathology services in Australia. It operates medical laboratories and patient collection centres. The company was formerly known as Primary Health Care Limited and changed its name to Healius Limited in December 2018. Healius Limited was incorporated in 1994 and is based in Sydney, Australia.

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We are updating our numbers for Healius’ (HLS) FY26 result. Revenues rose 2% to $1.4 billion, in-line with consensus, while underlying earnings before interest, tax, depreciation and amortisation (EBITDA) grew 8% to $259 million, 1% shy of consensus. Divisionally, pathology earnings were weaker-than-expected, while its bioanalytical laboratory business Agilex was better-than-expected. The result highlights the ongoing challenges facing its core pathology business. While revenue increased by just under 2%, in-line with the increase in Medicare benefits, margins remain low. The FY26 EBIT margin of 1.8% was below consensus expectations of 2.0% reflecting the burden of a largely fixed-cost operating base. Management has made progress in controlling costs, especially labour, but will need to do more if it is to offset headwinds from continued weak volumes and the Fair Work Commission’s (FWC) gender-based undervaluation decision on wages.

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The FWC’s decision is expected to increase costs by approximately $15 million in FY27. The second phase of these wage increases takes effect from October 2026. HLS is working with industry groups and the government on measures that could reduce the impact, but there is currently limited visibility on potential support. Management has pushed back its target of achieving a mid-to-high single-digit pathology EBIT margin to around December 2028 (from June 2027 previously). This delay reflects reduced general practitioner attendances and the FWC decision. Disappointingly too, was the company’s return to a net debt position of $33 million in FY26, although a potential sale of Agilex could help restore a net cash balance. HLS has engaged a consultant to explore a sale of Agilex and indicated further information should be available before the annual general meeting.

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We increase interest cost assumptions which lowers our earnings estimates, and we do not see HLS returning to profitability until FY28. Reflecting the earnings downgrades, the target price has been reduced from $0.56 to $0.49. We keep the Hold recommendation. While HLS is showing discipline on costs, the earnings recovery is likely to be gradual, with regulatory cost pressures and subdued pathology volumes continuing to constrain returns in the near-term.

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