Where Morgan Stanley stands on these 8 healthcare stocks post-reporting season

Morgan Stanley issued a research note on Wednesday outlining its re-rates of eight different ASX-listed large-cap healthcare stocks in the fading light of 2023’s first-half reporting season. 

The investment bank highlighted two big themes affecting the sector: 

• Private Health surgeries and claims have moved higher, but both remain below pre-COVID levels 

• Labour costs to healthcare services remain elevated as wage growth accelerates 

After a lacklustre 2022 for the healthcare sector, the bank remains equal- or overweight on the eight selected healthcare large-caps, with no underweight ratings.

If Morgan Stanley analysts are any guide, broker consensus is clearly warming up to the healthcare sector in early 2023—with some stocks stronger than others.

“Current prices” are accurate as at 2:15pm (AEST) Wednesday 1 March.

CSL Ltd (ASX: CSL)

Rating: OVERWEIGHT (retained) 

Price target: $339.00

Current price: $294.09

• Morgan Stanley has retained its OW rating for CSL despite lowering its price target from $354/sh to $339/sh. 

• Analysts predict margin recovery will be gradual through CY23 and beyond, with higher costs continuing to impact the books. 

• The bank has also stated physician and prescriber behaviour will need to change out of the mindsets adopted during last year, when supply chain constraints were more intense. 

Commentary:

“That said, we interpret management as bullish regarding medium/longer-term Immunoglobulin (Ig) yield improvements with this commentary provided: 1) market  demand growth is 6-9% p.a.; 2) CSL expects to beat market demand in its volume growth; and 3) with future Ig yield improvements, CSL could meet market demand without needing to increase collected plasma centers.”

Ebos Group (ASX: EBO)

Rating: OVERWEIGHT (retained)

Price target: $43.00

Current price: $39.76

• Morgan Stanley analysts are bullish given that Ebos beat expectations in its first-half report, raising the price target to $43/sh from $41/sh.

• The team highlighted that antiviral product sales within the company’s Community Pharmacy division is a difficult dataset to forecast growth.

• Analysts expect growth in EBO’s Animal Care division of 10bps with Animal Care earnings margins 17.5% in 1HFY23 vs. 14.1% in 1HFY22. 

Commentary:

“We see EBO holding a dominant market position through the access of two large brands, Chemist Warehouse and Terry White, providing benefits of scale within Community Pharmacy. We see EBO outgrowing the overall pharmacy industry via: 1) execution on the Terry White rollout plan - 1HFY23 added 26 net new partners; and 2) ongoing growth in the Chemist Warehouse franchise (contribution not disclosed) and the pull-through of dispensary sales.”

EBO's one year performance chart

Sonic Healthcare (ASX: SHL)

Rating: OVERWEIGHT (retained) 

Price target: $34.80

Current price: $32.26

Morgan Stanley rated SHL as OW despite lowering its price target to $34.80/sh from $35.05/sh. 

Analysts highlighted that Sonic’s revenue growth is outpacing the healthcare market.

Sonic’s pathology base business margin has returned to pre-COVID levels, despite labour cost growth of 7.5%. However, as a percentage of revenue, this remains in line with pre-COVID levels. 

Commentary: 

“Consumable costs as a percentage of revenue have declined and SHL expects procurement savings to continue - SHL's long tenured management and diverse business model are proving resilient in this inflationary environment.” 

Cochlear Ltd (ASX: COH)

Rating: EQUALWEIGHT (upgrade from UNDERWEIGHT) 

Price target: $214.00

Current price: $224.00

• Morgan Stanley upgraded its price target for Cochlear to $214/sh from $190/sh 

• Upgrade was driven by three key factors: better than expected unit growth double the bank’s expectations (14%+ growth actual vs. 7% expected), the rollout of the new N8 hearing aid in 2H23, and, “market share pendulum swinging back their way.”

COH's one year performance chart

Fisher & Paykel Healthcare Corporation (ASX: FPH)

Rating: EQUALWEIGHT (note FPH is expected to report FY23 results on 23 May)

Price target: $21.00

Current price: $23.45

• Morgan Stanley’s target price is lower than the current price of FPH, with analysts noting key issues ahead of the 23 May 23 FY23 report.

• Morgan Stanley highlighted FPH guidance suggests second-half FY23 revenue will be higher than first half, and that gross margins will increase 200bps during this period. 

• Analysts conversely pointed out Operational Expenditure growth is expected to climb by 8%.

Commentary: 

“Despite solid growth, FPH claims that sales were affected by the limited supply of treatment hardware – FPH sees a clearer supply chain in 2HFY23and we think that translates to higher numbers again.”

Medibank Private (ASX: MPL)

Rating: EQUALWEIGHT (retained)

Price target: $3.43

Current price: $3.34

• Morgan Stanley upgraded MPL’s price target to $3.43/sh from $3.05/sh. 

• MPL won government approval to increase its insurance premium by +2.96%, live 1 June. 

• Analysts highlighted that the claims environment “remains benign” 

• Bank also expects Medibank’s cybercrime costs to hit $40-$50mn as a non-recurring expense. 

Commentary: 

“We believe the COVID-19 situation will: 1) have an ongoing effect on utilisation of private health insurance in the Dec-22 quarter, though directionally up; and 2) make it more challenging for the industry to assess the near-term direction of the Deferred Claims Liability (DCL).”

MPL's one year performance chart

Resmed Inc (ASX: RMD)

Rating: EQUALWEIGHT (retained) 

Price target: $30.80

Current price: $31.66

• Morgan Stanley downgraded its RMD price target to $30.80/sh from $32.50, but retains an EQUALWEIGHT rating. Currently, Resmed is trading above the MS price target.

• Analysts noted RMD management is confident its share gains are permanent and not temporary. 

• Easing supply constraints may see the sale of more sleep apnoea machines and other flagship products. 

• US device revenue was the standout success of RMD’s first halfFY23 report. 

Commentary:

“We think it wise to stay on the side of conservatism until a clear path to full chip supply is observed [for Resmed’s internet-connected products.]” 

“Overall, we would need to see evidence that RMD can deliver an EPS increase of more than 10% in FY24 to become more constructive on current valuation.”

Ramsay Healthcare (ASX: RHC)

Rating: EQUALWEIGHT 

Price target: $67.10

Current price: $66.57

• Morgan Stanley upgraded its price target for RHC from $62.10/sh to $67.10/sh.

• Analysts highlighted strong performance in France and Nordic countries offset weakness in Australia and UK markets. 

• Patient activity recovery continues back to pre-COVID levels for Ramsay. 

• Total Australian surgery admissions per work day are 1.2% higher in the first half of FY23 vs the prior corresponding period. 

• Staff absenteeism and turnover has “declined materially” from peaks seen in early FY23 “but continue to impact RHC’s ability to meet demand.” 

Commentary: 

“With volume recovery on its way and evidence of operating leverage at the result, we find more comfort in RHC's ability to improve margins, albeit the tough conditions. However, due to: i) lower indexation paid by insurers; ii) costs to remain elevated; and iii) global nurse shortages, we do expect margins to take longer to recover and plateau just below pre-pandemic levels.”

RHC's one year performance chart