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3 healthcare stocks trading at a discount

Glenn Freeman  |  15 Nov 2017Text size  Decrease  Increase  |  
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One is a narrow-moat-rated pharmaceutical company, another is a pet care retailer and veterinary services provider, and the third is a pure-play in vitro fertilisation (IVF) specialist.

Australian Pharmaceutical Industries (ASX: API) is the most vertically integrated of Australia's three national pharmaceutical wholesalers. Holding a narrow moat, it has the competitive advantage of a strong retail distribution channel, courtesy of its Priceline Pharmacy Network, alongside its lower-margin wholesale pharmacy business.

As of 14 November, its $1.50 share price was below Morningstar's $2 fair value estimate (FVE). This FVE was recently reduced in recognition of the challenging retail environment, though "nonetheless, the stock appears undervalued, trading at an 18 per cent discount to our valuation," says Morningstar senior equity analyst, Chris Kallos.

"We were encouraged by the growth of the Priceline Pharmacy Network, which met management's target of an additional 20 new stores this year, bringing total franchisee stores to 337 across Australia.

"We expect this momentum to continue given the Priceline franchise value proposition, in light of challenges faced by independent pharmacies in Australia, including ongoing regulatory reform."

Who let the dogs out?

Greencross (ASX: GXL) provides healthcare of a different kind, as the dominant player in pet-care retailing and veterinary services. Though it has no moat, its latest share price of $5.28 is below Morningstar's $6.50 FVE.

While Morningstar equity analyst, Daniel Ragonese, acknowledges the higher costs of Greencross's future acquisitions are likely to slow its expansion, the fair value uncertainty rating was recently reduced to medium from high, "to reflect the resilient nature of industry demand and Greencross's dominant market position."

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Despite several challenges--including a strong competitive environment including from the likes of Amazon and a new competitor, Vet Partners--Ragonese expects Greencross will continue to benefit from growing industry demand and further integration of vet clinics within retail stores.

"Greencross is capitalising on this by increasing the number of in-store services, and in-store veterinary clinics," he says.

"At present, around 40 of the 250 retail stores have an in-store clinic. We forecast this number to grow by around 15 per year, with most new stores containing a clinic."

In vitro fertilisation

Virtus Health (ASX: VRT) is Morningstar's preferred exposure to specialist IVF healthcare services, with a stronger business than its main Australian competitor, Monash IVF Group (ASX: MVF).

"Traditional IVF is a key strength of the business and the main value driver of revenue. The Virtus service offering includes IVF cycles, cryostorage of frozen embryos, frozen embryo transfers, and intrauterine insemination," Kallos says.

In addition to a strong domestic business, which is supported by positive market dynamics and Medicare funding, it is also expanding internationally. Its recent acquisition of SIMS IVF in Ireland expands the potential service offering, both domestically and within the European market.

However, the business also faces various challenges.

"Virtus is segmenting the domestic market with a low-cost service offering and expanding the business offshore. Both of these strategies, in our opinion, add to the uncertainty of the business," Kallos says.

He notes that IVF services in Ireland are not subsidised, as they are in Australia. However, there is also no requirement for a referral from a medical practitioner in Ireland.

At a macroeconomic level, Kallos believes industry fundamentals remain favourable.

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Glenn Freeman is a senior editor at Morningstar.

© 2017 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

is senior editor for Morningstar Australia

© 2021 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'regulated financial advice' under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information, refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Morningstar’s full research reports are the source of any Morningstar Ratings and are available from Morningstar or your adviser. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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