Blended Australian Equities Portfolio Changes:
Increased weighting in Healius (HLS)
We are encouraged by evidence of an ongoing recovery in Healius’ core healthcare businesses in pathology, imaging, and day hospitals. HLS is Australia’s second largest pathology provider remaining well placed to be a beneficiary of the persistence of COVID-19 PCR testing. Elevated COVID-19 testing volumes are likely to continue with rolling State lockdowns, notably in Victoria, as low vaccine rates and the winter/flu season underpin demand. HLS’s Day Hospitals are also delivering strong growth with revenue up 22% in 1H21, supported by a growing demand for surgical procedures that avoid overnight admission to hospital.
HLS remains one of the cheapest stocks in the healthcare sector, trading at a discount to industry peers whilst offering an attractive EPS growth profile. Hence, with tangible signs of improving operational and industry trends coupled with undemanding valuation metrics we have added to HLS.
Increased weightin in Santos (STO)
We have also added to the Santos Energy holding in the portfolio. The stock has consolidated over the past rolling quarter, in line with the energy sector, both having declined ~7% compared to the ASX200 performance of 6.7%. In the prior 3-month period however, Santos returned 18% compared to the sector at 2.4% and the ASX200 at 1.9%.
The company’s production in the March quarter came in slightly ahead of market expectations and the sell down of a 25% equity interest in Bayu-Undan is expected to complete in the first half of 2021. The company reiterated production guidance, and the key development projects at Barossa, Darwin LNG and Moomba (carbon capture and storage) are running to schedule. Gearing remains at 33.6% but the company forecasts USD1b of free cashflow for the year at current oil prices. With developed economies broadly making progress on vaccinating their populations, supply discipline being maintained and notwithstanding setbacks in Asia ex-China, we have taken this opportunity to increase the position.
Reduce weighting in BHP Group (BHP)
BHP has benefitted from strong commodity markets and reported better than expected oil, copper, and iron ore production at its recent 3Q21 Report. We hold the position for the positive medium-term outlook for key commodities such as copper, however the iron ore has possibly reached its near- term zenith and we have taken some profits to reinvest in Santos.
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