Can a debt-free Healius return to growth and resume paying dividends?

Healius (ASX: HLS) is on the verge of becoming debt-free for the first time in over a decade after signing a $965 million bid to sell its radiology business, Lumus Imaging, to Affinity Equity Partners.

This deal has been long anticipated, with The Australian previously speculating that several equity firms, including Quadrant Private Equity, Adamantem Capital, and Bain Capital, were interested in acquiring Lumus.

Why does it matter?

Deleveraging balance sheet: Healthcare companies often carry substantial debt to fund growth through acquisitions and investments in medical centers, pathology labs, and imaging centers. Over the past decade, Healius has averaged approximately $1.29 billion in total debt on its balance sheet. However, these investments have not translated into meaningful operating leverage, with the company's pathology business delivering EBIT margins of approximately 1% in the first half of FY24, down from almost 10% just five years ago.

Post-sale, Healius expects to be in a "material net cash position," providing the capacity to execute new strategies in its continuing operations and for capital management. The company has stated its intention to prioritise the distribution of surplus proceeds to shareholders over time in a tax-efficient manner, which is noteworthy given that Healius has not paid a dividend since September 2022.

A good price: The sale price of $965 million has exceeded analyst expectations. Macquarie estimates that at trailing EBITDA multiples between 12-14x, Lumus would be valued between $580-670 million. This unexpectedly large cash injection has analysts looking for details on how surplus proceeds might be deployed into productivity and profitability initiatives within the pathology division.

Where to from here?

Healius recently reported a better-than-expected FY24 result, underpinned by an improved second-half performance across its pathology and imaging businesses. The company delivered $65 million in EBIT, at the top end of its recently revised range and 5% ahead of Macquarie forecasts. While the overall result was positive, it presented a mixed bag of outcomes, including:

• Improved 2H24 performance: Pathology's EBIT margins improved to 5% in the second half, up from 1% in the first.

• Transformation program benefits: Healius achieved $20 million in benefits in FY24, ahead of its guidance of $15 million.

• Pathology performance: The company's core pathology business (ex-Agilex, which was acquired in 2021) grew FY24 revenue by 1% compared to Macquarie's expectations of -0.9%.

• Solid Agilex growth: Agilex EBIT jumped 300% to 5 million, with EBIT margins of 12.9% (FY23: 4.0%), driven by revenue growth and cost management. Healius said the business as a strong revenue pipeline for FY25.

• Gearing uptick: Net debt to EBITDA ratio ticked up to 4.1x at Jun-24, up from 3.2x at Dec-23

• Elevated labour costs: Labour costs as a percentage of sales rose 150 bps to 52.1% in FY24, up from 50.6% in FY23.

• Pathology margins and trends: Healius' margins remain impacted by reduced GP referrals and broad inflationary pressures including labour, property leases and consumables.

Looking ahead, Healius reported a positive start to FY25, with pathology volumes up 4% year-on-year for July and August. The company is poised to have one of the strongest balance sheets in its recent history, with the potential for dividend payments resuming. However, the underlying business still faces challenges in a post-pandemic world, including industry-wide trends of lower GP referrals and persistent inflation.

The $965 million sale price for Lumus has likely caught many analysts off guard. In the coming days, they will likely adjust their forecasts to account for the additional surplus cash on the balance sheet and the possibility of a dividend within the next 6-12 months. While the pathology business' near-term improvement remains uncertain, the substantial cash injection provides Healius with more flexibility to try and execute its growth aspirations.