Citi’s top ASX 200 healthcare picks and two you should avoid

We’ve come to the end of a fairly tumultuous and unforgiving Aussie earnings season where companies struggled to live up to broker expectations and 54% of ASX 200 company share prices fell on the day of earnings, according to Commsec.

The healthcare sector was able to flex its defensive characteristics, withstanding the raft of inflation, labour market and supply chain-related headwinds impacting the broader operating environment. This was especially the case for larger cap healthcare stocks, with the number of reaffirmed guidance and positive outlooks outnumbering the negative ones.

More positives than negatives 

Amongst the large cap healthcare stocks under Citi’s coverage, there was only one guidance downgrade, two reaffirmed and three that had a positive outlook.

Guidance cut

• Ansell (ASX: ANN): Cut FY23 earnings per share guidance by 8% at mid-point as “demand conditions in the Healthcare segment are weaker than previously expected.”

Guidance reaffirmed

• Cochlear (ASX: COH): “Announced a surprise share buyback and reiterated guidance. Fears around the impact of covid in China didn’t materialise.”

• CSL (ASX: CSL): Plasma collections jumped 36% in the first half of FY23, earnings were upgraded but margins eased. A full-year net profit of US$2.7 to US$2.8 billion at constant currency was reaffirmed.

No guidance but outlook positive

• Ramsay Healthcare (ASX: RHC): “Result was incrementally positive for the outlook of the Australian business, mixed for France and negative for the UK. No guidance.”

• ResMed (ASX: RMD): Americas device sales jumped 41% in the second quarter and the new AirSense 11 product sales set to flow over the next few quarters.

• Sonic Healthcare (ASX: SHL): “Reassured the market on base margins post-covid and the base business is recovering faster than the rest of the market.”

What will the rest of 2023 bring?

Citi expects the revenue and earnings recovery to continue for companies that faced headwinds from the pandemic including:

• Cochlear

• CSL

• ResMed

• Integral Diagnostics (ASX: IDX

The results for the first half of FY23 indicated that the recovery is underway but occurring at a slower pace than what was previously expected.

The other point of contention was a post-Covid margin decline for stocks within the pathology and hospital hardware space including:

• Sonic Healthcare

• Australian Clinical Labs (ASX: ACL)

• Healius (ASX: HLS)

• Fisher & Paykel (ASX: FPH) 

Top healthcare picks

CSL: BUY with $350.00 target price

Key highlights: Plasma collection growth of 36% in the first-half was better-than-expected and 10% above pre-pandemic levels with costs per litre down 10% from peak FY22 levels. Behring margins disappointed, down 490 bps year-on-year to 49.1% and below consensus expectations of 51.5% but expected to return to pre-pandemic levels over the medium term. 

CSL 12-month price chart (Source: Market Index)

ResMed: BUY with $39.00 target price

Key highlights: The first-half result demonstrated an improving supply chain situation which supports “sequential device sales growth every quarter in FY23”. 

ResMed 12-month price chart (Source: Market Index)

Sonic Healthcare: BUY with $36.00 target price

Key highlights: The first-half FY23 result was in-line with expectations but expectations were extremely low going into the result. Sonic’s core pathology business was noted as “recovering faster than the rest of the market” due to the outperformance in its specialist and hospital business.

Sonic Healthcare 12-month price chart (Source: Market Index)

Australian Clinical Labs: BUY with $4.10 target price

Key highlights: “We expect the discount to peers to narrow once ACL delivers on margins without covid testing benefits.” 

Australian Clinical Labs 12-month price chart (Source: Market Index)

The ones you should avoid

Nanosonics: SELL with $4.20 target price

Key highlights: Management expects to launch the new Coris device in Europe or Australia in 2023. Coris seeks to establish new industry benchmarks for the high-level disinfection of endoscopes. Areas of caution include a slower than anticipated rollout in EU and hospital budget pressures, which has caused some delays in orders.

Nanosonics 12-month price chart (Source: Market Index)

Sigma Healthcare: SELL with $0.52 target price

Key highlights: Troubled ERP implementation has been a major setback for the company and reduced market share from 22% to 18% and more importantly, “customers have lost confidence – the risk is that disruptions could continue, customers could take a period of time to regain confidence and return to Sigma.”

Sigma Healthcare 12-month price chart (Source: Market Index)