Healthcare - Overall. Patient in the ER but remains alive and well. Sector Note. Overweight (no change)

Transcription

1 Sector Note Overweight (no change) Highlighted companies CSL ADD, TP A$103.75, A$ close A well-diversified product portfolio and reinvesting for future growth as the R&D pipeline evolves, with ongoing capital management remaining supportive. Regis Healthcare ADD, TP A$6.00, A$6.00 close Australian aged care operator with good earnings momentum, as government income and resident contributions are increasing, the brown/greenfield pipeline is solid and industry fundamentals are good. Healthscope ADD, TP A$3.22, A$2.33 close While increased regulatory risk and asset improvements create near-term earnings uncertainty, a defensible reputation for quality and service along with on time and on budget expansion programs, should reward investors on a medium/longer term view. Healthcare - Overall Patient in the ER but remains alive and well The healthcare sector has been one of the most consistent performers over the past 10 years, underperforming the ASX200 only 2 times over the past decade. However, increased regulatory scrutiny and soft industry data have taken some gloss off the domestic service providers (SHL, PRY, RHC, HSO, CAJ, IDX), with ongoing government reviews creating earnings uncertainty and representing a near-term overhang. While we continue to view sector long-term prognosis as good and fundamentals as sound, we acknowledge sector sentiment is poor and investors should be positioned in subsectors with lower exposure (ie aged care, pharma). We expect large/mid-cap names to be in-line this reporting season, but see risk skewed to the upside for BKL and to the downside for SHL, CAJ and SRX. Healthcare services sub-sector hit by regulatory uncertainty While healthcare has been a solid outperformer over the past decade (+110% vs ASX200), the last few months have been considerably weak as domestic Medicare data has pointed to soft 1HFY16 growth (GP volumes 4.2%, -250pts yoy; Diagnostic Imaging (DI) 1.7%, -630pt yoy; Pathology 1.9%, flat yoy) and sovereign risk is intensifying as the government has proposed to remove A$650m in bulk-billing incentives for Pathology and DI over the next 4 years and is currently running 6 separate reviews across the space to weed out lowvalue care, improve services at the primary care level, and achieve the best patient outcomes at the lowest cost. While this primarily clouds the earnings outlook for domestic service providers (SHL, PRY, CAJ, IDX), hospital operators like RHC and HSO are not immune, especially as industry growth also looks to be moderating (September quarter +4.7% versus 12-month rolling growth of +7%) and as health funds (eg MPL, NHF, Bupa) push for more quality-based patient outcomes. Mostly in-line results, but upside (BKL) and downside (SHL, CAJ, SRX) Outside ANN s recent downgrade, which was not surprising given the general malaise if not a recession in the industrial and manufacturing economies, we do not expect any major surprises this reporting season and view outlook commentary to be the main crux of investors focus. However, we see the most potential for upside in BKL, on continued strength in Asian sales and operational efficiencies, whereas the likelihood for downside resides with SHL, on domestic weakness and 2H skew, CAJ, on integration issues and regulatory concerns and SRX, on difficult comps and dose sales below guidance, albeit FX should be a tailwind. Relative valuation not that demanding, but a buffer is required While the ASX200 Healthcare index trades 13% above its long-term average on an absolute basis (23.2x versus 20.5x), the index trades c3% above the longterm mean (1.48x versus 1.44x) and 2% below 1SD. That said, with heightened regulatory risk, we believe a better buffer is required. Names that we believe offer the best relative value include aged care operators (JHC, REG) and HSO (over the medium/longer term). Dr Derek JELLINEK T (61) E derek.jellinek@morgans.com.au Scott POWER T (61) E scott.power@morgans.com.au Key picks CSL, REG and HSO/RHC over the medium/longer term While we continue to view key drivers as intact and note industry data is historically volatile and tends not to correlate with company performance, regulatory unknowns and poor sector sentiment should tilt investment considerations to where exposure is lower. In pharmaceuticals, we like CSL as it reinvests for the future and remain confident in the future growth trajectory. In healthcare services, industry dynamics remain robust for aged care operators (REG and JHC) and despite current concerns, scalable quality portfolios of the hospital operators (HSO/RHC) are attractive on a medium/longer term view. IMPORTANT DISCLOSURES REGARDING COMPANIES THAT ARE THE SUBJECT OF THIS REPORT AND AN EXPLANATION OF RECOMMENDATIONS CAN BE FOUND AT THE END OF THIS DOCUMENT. MORGANS FINANCIAL LIMITED (ABN ) AFSL A PARTICIPANT OF ASX GROUP Powered by EFA

2 KEY CHARTS Stock picking rules the roost Despite ongoing lambasting of the healthcare sector in the press and increased regulatory risk, the ASX200 Healthcare index managed to consistently outperform the broader market over the year. As expected, however, there is a large discrepancy between names that have outperformed versus those that have not, highlighting sub-sector divergence - pharma and medtech winners; services, diagnostics - losers; biotech - mixed. We expect this trend to continue until we gain more clarity on the regulatory front. Relative valuation not that demanding The ASX 200 Healthcare Index, relative to the ASX 200, trades c2% above the long-term mean (1.48x vs 1.44x), but 2% below 1SD. Interestingly, despite the increased regulatory risk and weaker stock prices for some names across the space, the PE multiple has not contracted significantly since the start of FY15. We believe this may be due to the declining AUD/USD helping to expand earnings Indices Last Price Price -12 mnths 1 mnth 3 mnth 6 mnth 1 yr ASX % -7.0% -14.4% -15.6% ASX 200 HC % 3.6% -2.2% 7.7% ASX 200 Telco % 4.1% -12.3% -12.3% ASX 200 Consumer Staples % 4.2% -4.6% -10.7% ASX 200 Utilities % -0.0% 2.3% 6.4% ASX200 covered Cos ANN % -5.7% -26.3% -17.7% COH % 7.5% 4.0% 11.3% CSL % 12.3% 4.5% 19.7% HSO % -13.7% -15.0% -12.4% JHC % -8.8% 4.3% 45.0% PRY % -35.6% -47.2% -49.3% REG % 2.2% 1.5% 164.4% RHC % -2.1% -9.9% 0.7% RMD % 0.4% 6.0% 1.4% SHL % -5.0% -12.3% -4.1% SRX % -5.4% 16.4% 30.7% VRT % -2.2% 17.6% -21.6% 12 mnth fwd relativ e PE to ASX St dev -1 St dev 0.5 Jan-2011 Jan-2012 Jan-2013 Jan-2014 Jan-2015 Jan-2016 HC relative to ASX200 Average +1 St dev -1 St dev Where the value can be found Given the market correction since April last year on a myriad of concerns (eg falling commodity prices, China currency devaluation and slowing growth, US interest rate changes, and an uncertain domestic picture), along with sector specific news, certain valuations have become more attractive. Looking across our universe, large/midcaps that offer the best relative value include aged care operators (JHC, REG), IVF players (VRT and MVF) and HSO over the medium/longer term ANN BKL CAJ COH CSL HSO JHC MVF PRY REG RHC RMD SHL VRT 5 yr PER 5 yr av PER -1SD +1SD Solid growth prospect Comparing three-year earnings CAGR to 12-month forward PEs across large/mid-cap healthcare, we see almost all exceed the broader market. BKL stands above its peers, but at 29x it is priced for growth, whereas CAJ looks cheap, but its growth prospects are questionable on integration issues and regulatory concerns, in our view. IVF players (VRT and MVF) look interesting, as the IVF industry improves from depressed levels last fiscal year. HSO and SHL look good value, but sovereign risk remains. While expensive based on this matrix, we continue to like CSL as it is reinvesting through FY16 to support its growth over the medium/longer term and RGS, on positive industry dynamics. 35 PE 30 BKL 25 SRX 20 CSL COH 15 ASX200 RHC REG HSO JHC 10 RMD SHL VRT CAJ ANN 5 MVF PRY 3 yr EPS CAGR 0 0% 10% 20% 30% 40% SOURCE: MORGANS, COMPANY REPORTS 2

3 Figure 1: Global comps Pharma Mkt Cap EV/EBITDA PE EPS growth Ticker Yr End Mkt Cap (US$) FY0 FY1 FY2 FY3 FY0 FY1 FY2 FY3 FY1 FY2 FY3 3Y CAGR CSL - Consensus CSL 06/ ,304 35, % 15.9% 12.6% 9.8% 2.62 PEG 3Y CAGR Johnson & Johnson JNJ 12/ , , % 5.9% 6.1% 5.6% 3.01 Pfizer PFE 12/ , , % 10.5% 11.1% 9.0% 1.51 Novartis NVS 12/ , , % 9.3% 10.0% 6.5% 1.49 Merck MRK 12/ , , % 2.7% 9.7% 5.3% 2.63 GlaxoSmithKline GSK 12/ , , NA 6.3% 5.8% NA NA Average 183, , % 6.4% 8.2% 6.6% 2.2 Biotech Amgen AMGN 12/ , , % 12.3% 7.4% 12.7% 1.18 Gilead Sciences GILD 12/ , , % 2.3% 7.8% 4.2% 1.67 Celgene Corporation CELG 12/ ,165 78, % 27.1% 22.1% 59.3% 0.36 Baxter BAX 12/ ,929 20, % 17.8% 14.4% 13.6% 2.24 Biogen Idec BIIB 12/ ,136 59, % 8.2% 7.6% 11.0% 1.48 Average 79,399 79, % 13.5% 11.8% 20.2% 1.4 Medical devices Cochlear COH 06/2015 5,399 3, % 13.5% 11.6% 9.3% 3.68 Resmed RMD 06/2015 8,064 8, % 11.2% 14.3% 10.2% 2.23 Johnson & Johnson JNJ 12/ , , % 5.9% 6.1% 5.6% 3.01 Medtronic MDT 04/ , , % 11.2% 10.9% 8.0% 2.25 Sonova SOON 03/2015 8,048 8, NA 15.2% 11.4% 4.5% 4.69 St Jude STJ 12/ ,868 14, % 9.5% 8.8% 6.8% 1.98 Stryker SYK 12/ ,210 37, % 9.7% 9.2% 9.5% 2.05 Boston Scientific BSX 12/ ,850 23, % 15.1% 13.6% 12.5% 1.72 Fisher & Paykel FPH 03/2015 4,870 3, NA 23.3% 20.4% 13.6% 3.20 Average 69,154 68, % 12.8% 11.5% 8.6% 2.4 Pathology & Radiology Sonic Healthcare SHL 06/2015 7,604 5, % 4.2% 7.3% 4.2% 4.75 Primary Health Care PRY 06/2015 1, % -4.4% 11.2% -1.0% NA Capital Health CAJ 06/ % -12.5% 0.0% -5.8% NA Laboratory Corp LH 12/ ,005 11, % 10.6% 10.8% 12.4% 1.29 Quest Diagnostics DGX 12/2015 9,177 9, % 5.8% 4.7% 5.8% 2.32 Average 10,091 10, % 8.2% 7.8% 9.1% 1.2 Hospitals Ramsay Healthcare RHC 06/ ,175 8, % 14.0% 9.4% 7.2% 4.16 Healthscope HSO 06/2015 3,930 2, % 13.2% 11.6% 7.3% 3.22 Community Health SystemCYH 12/2014 2,394 2, % 5.0% 6.5% 6.1% 1.02 Kindred Healthcare. Inc KND 12/ % -12.7% 5.4% 2.8% 3.20 Lifepoint Hospitals LPNT 12/2014 3,037 3, % 6.3% 8.6% 11.8% 1.80 Universal Health Serv UHS 12/ ,980 10, % 7.6% 9.6% 12.0% 1.61 Apollo Hospitals APHS 03/ ,538 3, NA 24.5% 28.7% 15.6% 3.69 Bangkok Chain Hospital BCH 12/ , NA 40.0% 14.3% 7.3% 5.24 IHH Healthcare IHH 12/ ,092 12, NA 21.4% 20.6% NA NA Bumrungard Hospital BH 12/ ,483 4, % 15.9% 15.0% 15.1% 4.11 KPJ Healthcare KPJ 12/2014 4,521 1, NA 11.8% 10.5% 0.3% Raffles Medical Group RFMD 12/2014 2,392 1, NA 14.1% 15.5% 5.5% 6.20 Average 43,304 4, % 13.4% 13.5% 8.5% 13.1 Aged Care Japara Healthcare JHC 06/ % 18.8% 14.9% 8.0% 3.27 Regis REG 06/2015 1,778 1, % 13.1% 16.8% 0.7% Average 1, % 16.0% 15.8% 4.4% 1.6 IVF Virtus Health VRT 06/ % 7.5% 7.9% 0.3% Monash MVF 06/ % 7.6% 5.9% 5.4% 2.89 Average % 7.6% 6.9% 2.8% 20.8 Industrials, Household & Personal Products Ansell ANN 06/2015 2,317 1, % 3.0% 7.1% 2.3% 4.01 Blackmores BKL 06/2015 3,055 2, % 25.5% 27.8% 39.7% 1.78 Top Glove TOPG 08/2015 7,011 1, % 6.1% 3.4% 12.3% 2.26 Honeywell HON 12/ ,734 78, % 9.6% 8.9% 8.8% M MMM 12/ ,909 93, % 8.5% 8.3% 7.7% 2.57 Kimberley-Clarke KMB 12/ ,324 47, % 8.1% 7.3% 7.2% 3.13 Supermax SUCB 12/2014 2, % 0.0% 10.4% 5.4% 3.38 Hartalega HART 03/2015 8,598 2, % 16.3% 14.0% 12.2% 3.07 Reckitt RB 12/ ,265 64, % 7.9% 7.4% 2.0% Church & Dwight CHD 12/ ,417 11, % 7.6% 6.3% 7.2% 3.71 Fastenal FAST 12/ ,481 11, % 6.9% 9.4% 6.4% 3.45 Grainger GWW 12/ ,410 12, % 8.9% 10.6% 5.5% 3.07 Average 31,717 32, % 8.0% 8.6% 7.5% 3.7 3

4 Figure 2: Financial summary- BKL Blackmores Year end June Closing price (A$) Target price (A$) Divisional sales Preferred methodology Blended Valuation Total revenue DCF valuation inputs EBITDA Rf 5.25% 10-year rate 5.25% Associate income Rm-Rf 6.00% Margin 2.0% Depreciation (5.8) (6.0) (6.4) (6.4) (6.4) Beta 0.98 Kd 7.25% EBITA CAPM (Rf+Beta(Rm-Rf)) 11.1% Ke 11.1% Amortisation/impairment (0.5) (0.4) (0.4) (0.4) (0.4) E/EV*Ke+D/EV*Kd(1-t) NPV cash flow (A$m) EBIT Equity (E/EV) 65.0% Minority interest (A$m) 0.0 EBIT(incl associate profit) Debt (D/EV) 35.0% Net debt (A$m) 7.1 Net interest expense (4.8) (3.4) (1.2) (1.0) 0.2 Interest rate 7.3% Investments (A$m) 2.2 Pre-tax profit Tax rate (t) 30.0% Equity market value (A$m) Income tax expense (9.5) (22.3) (41.3) (48.8) (52.2) WACC 9.0% Diluted no. of shares (m) 16.8 After-tax profit DCF Valuation (A$) NPAT (normalised) Multiples 2015A 2016F 2017F 2018F Significant items Enterprise value (A$m) 3, , , ,987.3 NPAT (reported) EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) Cash flow (A$m) 2014A 2015A 2016F 2017F 2018F PE (normalised) (x) EBITDA PEG (normalised) (x) Change in working capital (41.9) (11.1) (5.2) Price/Book (x) Net interest (pd)/rec (4.8) (3.4) (1.2) (1.0) 0.2 Taxes paid (9.5) (22.3) (41.3) (48.8) (52.2) At target price 2015A 2016F 2017F 2018F Other oper cash items EV/EBITDA (x) Cash flow from ops (1) PE (normalised) (x) Capex (2) (4.7) (3.2) (6.0) (6.4) (6.4) Disposals/(acquisitions) Comparable company data (x) 2016F 2017F 2018F Other investing cash flow Ramsay Health Care EV/EBITDA Cash flow from invest (3) (4.7) (3.2) (6.0) (6.4) (6.4) Y/E June EV/EBIT Incr/(decr) in equity PE Incr/(decr) in debt (14.0) (29.0) PEG Ordinary dividend paid (18.1) (22.7) (43.8) (65.6) (74.7) Cochlear EV/EBITDA Preferred dividends (4) Y/E June EV/EBIT Other financing cash flow PE Cash flow from fin (5) (32.1) (51.7) (43.8) (65.6) (74.7) PEG Inc/(decr) cash ( ) Per share data 2015A 2016F 2017F 2018F Equity FCF (1+2+4) No. shares EPS (normalised) (cps) Balance sheet (A$m) 2014A 2015A 2016F 2017F 2018F EPS (dil. normalised) (cps) Cash & deposits Dividend per share (cps) Trade debtors Franking (%) 100% 100% 100% 100% Inventory Dividend payout ratio (%) 73.1% 69.0% 69.0% 69.0% Investments Dividend yield (%) 1.2% 2.1% 2.5% 2.7% Other intangible assets Growth ratios 2015A 2016F 2017F 2018F Fixed assets Sales growth 36.0% 49.5% 10.0% 4.6% Other assets Operating cost growth 30.5% 44.0% 8.3% 4.2% Total assets EBITDA growth 71.0% 76.3% 16.8% 6.1% Short-term borrowings EBITA growth 80.7% 82.0% 17.6% 6.3% Trade payables EBIT growth 81.9% 82.5% 17.7% 6.3% Long-term borrowings Reported NPAT growth 83.5% 92.0% 18.0% 7.1% Provisions Normalised NPAT growth 83.5% 92.0% 18.0% 7.1% Other liabilities Reported EPS growth 83.5% 92.0% 18.0% 7.1% Total liabilities Normalised EPS growth 83.5% 92.0% 18.0% 7.1% Share capital Asset turnover 32.7% 36.5% 46.7% 45.8% Other reserves EBITDA margin 16.7% 19.7% 20.9% 21.2% FCTR EBIT margin 15.3% 18.7% 20.0% 20.4% Unrealised gains/losses Net profit margin 9.9% 12.7% 13.6% 13.9% Retained earnings Return on net assets 54.4% 73.9% 71.1% 64.3% Other equity Net debt (A$m) Total equity Net debt/equity 5.3% 1.3% -12.3% -23.6% Minority interest Net interest/ebit cover (x) Total shareholders' equity ROIC 46.2% 87.6% 81.0% 81.6% Total liabilities & SE Current ratio (x) Receivables turnover (x) Payables turnover (x)

5 Figure 3: Financial summary- CAJ Capitol Health Year end June Closing price (A$) 0.18 Target price (A$) 0.37 Divisional sales Preferred methodology DCF/PE Compco Valuation 0.37 Total revenue DCF valuation inputs EBITDA Rf 5.00% 10-year rate 5.00% Associate income Rm-Rf 4.50% Margin 2.0% Depreciation (3.5) (4.9) (5.5) (6.1) (7.9) Beta 1.56 Kd 7.00% EBITA CAPM (Rf+Beta(Rm-Rf)) 12.0% Ke 12.0% Amortisation/impairment E/EV*Ke+D/EV*Kd(1-t) NPV cash flow (A$m) #N/A EBIT Equity (E/EV) 70.0% Minority interest (A$m) #N/A EBIT(incl associate profit) Debt (D/EV) 30.0% Net debt (A$m) 38.3 Net interest expense (0.7) (1.0) (1.0) (1.3) (1.3) Interest rate 7.0% Investments (A$m) 0.0 Pre-tax profit Tax rate (t) 30.0% Equity market value (A$m) Income tax expense (3.0) (3.9) (4.3) (4.4) (4.5) WACC 9.9% Diluted no. of shares (m) After-tax profit DCF Valuation (A$) 0.50 NPAT (normalised) Multiples 2015A 2016F 2017F 2018F Significant items Enterprise value (A$m) NPAT (reported) EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) Cash flow (A$m) 2014A 2015A 2016F 2017F 2018F PE (normalised) (x) EBITDA PEG (normalised) (x) (0.4) 0.1 (1.6) 1.6 Change in working capital (1.4) (6.8) 1.3 (2.7) (1.2) Price/Book (x) Net interest (pd)/rec (0.7) (1.0) (1.0) (1.3) (1.3) Taxes paid At target price 2015A 2016F 2017F 2018F Other oper cash items EV/EBITDA (x) Cash flow from ops (1) PE (normalised) (x) Capex (2) (3.0) (94.8) (7.6) (8.4) (9.2) Disposals/(acquisitions) Comparable company data (x) 2016F 2017F 2018F Other investing cash flow Ramsay Health Care EV/EBITDA Cash flow from invest (3) (3.0) (94.8) (7.6) (8.4) (9.2) Y/E June EV/EBIT Incr/(decr) in equity (0.0) (0.0) (0.0) PE Incr/(decr) in debt (3.4) PEG Ordinary dividend paid (2.7) (5.6) (7.8) (8.4) (8.4) Cochlear EV/EBITDA Preferred dividends (4) Y/E June EV/EBIT Other financing cash flow PE Cash flow from fin (5) (6.1) (7.8) (8.4) (8.4) PEG Inc/(decr) cash ( ) (0.3) (5.0) (3.7) Per share data 2015A 2016F 2017F 2018F Equity FCF (1+2+4) 5.7 (93.7) No. shares EPS (normalised) (cps) Balance sheet (A$m) 2014A 2015A 2016F 2017F 2018F EPS (dil. normalised) (cps) Cash & deposits Dividend per share (cps) Trade debtors Franking (%) n.a. n.a. n.a. n.a. Inventory Dividend payout ratio (%) 141.9% 74.0% 83.8% 79.4% Investments Dividend yield (%) 7.1% 8.6% 9.1% 9.1% Other intangible assets Growth ratios 2015A 2016F 2017F 2018F Fixed assets Sales growth 24.2% 37.4% 11.6% 7.1% Other assets Operating cost growth 27.7% 36.3% 12.5% 6.4% Total assets EBITDA growth -4.0% 51.0% 4.7% 11.5% Short-term borrowings EBITA growth -18.3% 72.5% 2.8% 4.4% Trade payables EBIT growth -18.3% 72.5% 2.8% 4.4% Long-term borrowings Reported NPAT growth -45.1% 153.5% -0.2% 5.6% Provisions Normalised NPAT growth -45.1% 153.5% -0.2% 5.6% Other liabilities Reported EPS growth -49.8% 130.0% -5.8% 5.6% Total liabilities Normalised EPS growth -49.8% 130.0% -5.8% 5.6% Share capital Asset turnover 17.5% 14.4% 19.4% 21.1% Other reserves EBITDA margin 12.4% 13.7% 12.8% 13.4% FCTR EBIT margin 8.0% 10.0% 9.3% 9.0% Unrealised gains/losses Net profit margin 3.6% 6.6% 5.9% 5.8% Retained earnings Return on net assets 9.4% 15.8% 16.0% 16.4% Other equity Net debt (A$m) Total equity Net debt/equity 40.8% 41.3% 38.6% 35.6% Minority interest Net interest/ebit cover (x) Total shareholders' equity ROIC 18.8% 10.8% 10.8% 11.3% Total liabilities & SE Current ratio (x) Receivables turnover (x) Payables turnover (x)

6 Figure 4: Financial summary- COH Cochlear Year end June Closing price (A$) Target price (A$) Divisional sales ,106 1,158 1,227 Preferred methodology DCF, EV/EBITDA, PE Valuation Total revenue ,076 1,146 1,227 DCF valuation inputs EBITDA Rf 4.25% 10-year rate 4.25% Associate income Rm-Rf 6.00% Margin 2.0% Depreciation (26.9) (30.3) (30.6) (31.2) (31.8) Beta 0.92 Kd 6.25% EBITA CAPM (Rf+Beta(Rm-Rf)) 9.8% Ke 9.8% Amortisation/impairment E/EV*Ke+D/EV*Kd(1-t) NPV cash flow (A$m) EBIT Equity (E/EV) 65.0% Minority interest (A$m) 0.0 EBIT(incl associate profit) Debt (D/EV) 35.0% Net debt (A$m) Net interest expense (10.0) (10.1) (9.1) (8.8) (7.9) Interest rate 6.3% Investments (A$m) 1.9 Pre-tax profit Tax rate (t) 24.5% Equity market value (A$m) Income tax expense (30.1) (50.5) (58.1) (64.2) (70.7) WACC 8.0% Diluted no. of shares (m) 56.8 After-tax profit DCF Valuation (A$) NPAT (normalised) Multiples 2015A 2016F 2017F 2018F Significant items (15.8) Enterprise value (A$m) 5, , , ,543.5 NPAT (reported) EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) Cash flow (A$m) 2014A 2015A 2016F 2017F 2018F PE (normalised) (x) EBITDA PEG (normalised) (x) Change in working capital (26.4) (34.7) (52.1) (16.5) (22.0) Price/Book (x) Net interest (pd)/rec (10.6) (7.6) (9.1) (8.8) (7.9) Taxes paid (24.6) (32.2) (58.1) (64.2) (70.7) At target price 2015A 2016F 2017F 2018F Other oper cash items (3.5) EV/EBITDA (x) Cash flow from ops (1) PE (normalised) (x) Capex (2) (30.5) (28.4) (42.8) (43.6) (44.5) Disposals/(acquisitions) (1.5) Comparable company data (x) 2016F 2017F 2018F Other investing cash flow Ramsay Health Care EV/EBITDA Cash flow from invest (3) (31.9) (28.4) (42.8) (43.6) (44.5) Y/E June EV/EBIT Incr/(decr) in equity PE Incr/(decr) in debt 67.0 (25.0) PEG Ordinary dividend paid (144.9) (123.8) (121.5) (134.2) (147.6) Sonic Healthcare EV/EBITDA Preferred dividends (4) Y/E June EV/EBIT Other financing cash flow PE Cash flow from fin (5) (77.9) (148.8) (121.5) (134.2) (147.6) PEG Inc/(decr) cash ( ) (11.4) Per share data 2015A 2016F 2017F 2018F Equity FCF (1+2+4) No. shares EPS (normalised) (cps) Balance sheet (A$m) 2014A 2015A 2016F 2017F 2018F EPS (dil. normalised) (cps) Cash & deposits Dividend per share (cps) Trade debtors Franking (%) 100% 100% 100% 100% Inventory Dividend payout ratio (%) 74.6% 70.0% 69.9% 70.0% Investments Dividend yield (%) 2.0% 2.3% 2.5% 2.7% Other intangible assets Growth ratios 2015A 2016F 2017F 2018F Fixed assets Sales growth 14.7% 17.4% 4.7% 6.0% Other assets Operating cost growth 9.6% 16.6% 5.7% 6.5% Total assets , ,100.3 EBITDA growth 34.1% 15.0% 9.0% 8.6% Short-term borrowings EBITA growth 38.0% 17.1% 9.9% 9.4% Trade payables EBIT growth 38.0% 17.1% 9.9% 9.4% Long-term borrowings Reported NPAT growth 55.6% 19.6% 10.4% 10.1% Provisions Normalised NPAT growth 33.2% 19.6% 10.4% 10.1% Other liabilities Reported EPS growth 55.2% 20.0% 10.4% 10.0% Total liabilities Normalised EPS growth 32.8% 20.0% 10.4% 10.0% Share capital Asset turnover 24.8% 25.9% 28.1% 27.3% Other reserves (32.2) (26.2) (26.2) (26.2) (26.2) EBITDA margin 25.1% 24.6% 25.6% 26.3% FCTR EBIT margin 21.9% 21.9% 22.9% 23.7% Unrealised gains/losses Net profit margin 15.5% 15.8% 16.6% 17.3% Retained earnings Return on net assets 58.1% 59.2% 56.9% 54.7% Other equity Net debt (A$m) Total equity Net debt/equity 39.5% 37.2% 26.2% 17.5% Minority interest Net interest/ebit cover (x) Total shareholders' equity ROIC 27.8% 32.6% 32.1% 33.6% Total liabilities & SE , ,100.3 Current ratio (x) Receivables turnover (x) Payables turnover (x)

7 Figure 5: Financial summary- CSL CSL Ltd Year end June Closing price (A$) Target price (A$) Income statement (US$m) 2014A 2015A 2016F 2017F 2018F Valuation metrics Divisional sales 5,335 5,459 5,845 6,434 7,027 Preferred methodology DCF, EV/EBITDA, PE Valuation Total revenue 5,504 5,613 6,009 6,597 7,189 DCF valuation inputs EBITDA 1, , , , ,491.0 Rf 4.25% 10-year rate 4.25% Associate income Rm-Rf 6.00% Margin 1.0% Depreciation (165.5) (156.3) (167.4) (184.2) (201.2) Beta 1.33 Kd 5.25% EBITA 1, , , , ,289.8 CAPM (Rf+Beta(Rm-Rf)) 12.2% Ke 12.2% Amortisation/impairment (29.4) (25.0) (26.8) (29.5) (32.2) E/EV*Ke+D/EV*Kd(1-t) NPV cash flow (US$m) EBIT 1, , , , ,257.7 Equity (E/EV) 64.0% Minority interest (US$m) 0.0 EBIT(incl associate profit) 1, , , , ,257.7 Debt (D/EV) 36.0% Net debt (US$m) Net interest expense (32.9) (44.0) (56.0) (51.9) (31.9) Interest rate 5.3% Investments (US$m) 11.7 Pre-tax profit 1, , , , ,225.7 Tax rate (t) 30.0% Equity market value (US$m) Income tax expense (297.3) (335.0) (356.1) (401.5) (450.1) WACC 9.1% Diluted no. of shares (m) After-tax profit 1, , , , ,775.6 DCF Valuation (A$) NPAT (normalised) 1, , , , ,775.6 Multiples 2015A 2016F 2017F 2018F Significant items Enterprise value (US$m) 35, , , ,875.9 NPAT (reported) 1, , , , ,775.6 EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) Cash flow (US$m) 2014A 2015A 2016F 2017F 2018F PE (normalised) (x) EBITDA 1, , , , ,491.0 PEG (normalised) (x) Change in working capital (128.3) (111.4) 2.3 (252.2) (212.4) Price/Book (x) Net interest (pd)/rec (29.5) (39.0) (56.0) (51.9) (31.9) Taxes paid (349.1) (281.0) (356.1) (401.5) (450.1) At target price 2015A 2016F 2017F 2018F Other oper cash items 35.5 (144.3) EV/EBITDA (x) Cash flow from ops (1) 1, , , , ,796.6 PE (normalised) (x) Capex (2) (353.9) (347.8) (355.2) (362.9) (371.1) Disposals/(acquisitions) (48.0) (66.0) (218.0) Comparable company data (x) 2016F 2017F 2018F Other investing cash flow Ramsay Health Care EV/EBITDA Cash flow from invest (3) (401.5) (413.3) (573.2) (362.9) (371.1) Y/E June EV/EBIT Incr/(decr) in equity (812.1) (783.9) (805.5) PE Incr/(decr) in debt PEG Ordinary dividend paid (521.5) (535.4) (571.0) (596.2) (663.9) Sonic Healthcare EV/EBITDA Preferred dividends (4) Y/E June EV/EBIT Other financing cash flow PE Cash flow from fin (5) (1,137.1) (828.1) (885.3) (596.2) (663.9) PEG Inc/(decr) cash ( ) (177.9) Per share data 2015A 2016F 2017F 2018F Equity FCF (1+2+4) 1, , , , ,425.5 No. shares EPS (normalised) (cps) Balance sheet (US$m) 2014A 2015A 2016F 2017F 2018F EPS (dil. normalised) (cps) Cash & deposits , ,099.7 Dividend per share (cps) Trade debtors , , , ,207.6 Franking (%) 0% 0% 0% 0% Inventory 1, , , , ,215.4 Dividend payout ratio (%) 41.9% 38.2% 39.5% 39.6% Investments Dividend yield (%) 0.8% 0.8% 0.9% 1.0% Other intangible assets Growth ratios 2015A 2016F 2017F 2018F Fixed assets 1, , , , ,901.8 Sales growth 2.3% 7.1% 10.1% 9.2% Other assets Operating cost growth 0.0% 7.7% 9.5% 8.4% Total assets 6, , , , ,961.1 EBITDA growth 5.9% 5.8% 10.3% 10.1% Short-term borrowings EBITA growth 7.0% 5.7% 10.3% 10.2% Trade payables EBIT growth 7.4% 5.7% 10.3% 10.2% Long-term borrowings 1, , , , ,670.7 Reported NPAT growth 4.1% 7.0% 6.4% 11.3% Provisions Normalised NPAT growth 7.2% 7.0% 6.5% 11.3% Other liabilities , ,233.9 Reported EPS growth 6.8% 10.5% 7.6% 11.3% Total liabilities 3, , , , ,046.3 Normalised EPS growth 10.0% 10.4% 7.7% 11.3% Share capital Asset turnover 21.0% 19.8% 18.1% 17.2% Other reserves EBITDA margin 35.5% 35.1% 35.2% 35.5% FCTR EBIT margin 32.2% 31.8% 31.8% 32.1% Unrealised gains/losses Net profit margin 25.7% 25.6% 24.8% 25.3% Retained earnings 5, , , , ,974.2 Return on net assets 64.0% 64.7% 53.4% 45.9% Other equity (2,797.8) (3,560.4) (4,365.9) (4,365.9) (4,365.9) Net debt (US$m) Total equity 3, , , , ,914.8 Net debt/equity 62.8% 70.8% 37.4% 13.7% Minority interest Net interest/ebit cover (x) Total shareholders' equity 3, , , , ,914.8 ROIC 25.6% 26.5% 26.9% 27.7% Total liabilities & SE 6, , , , ,961.1 Current ratio (x) Receivables turnover (x) Payables turnover (x) USD/USD

8 Figure 6: Financial summary- HSO Healthscope Year end June Closing price (A$) 2.33 Target price (A$) 3.22 Divisional sales 2,326 2,438 2,291 2,598 2,835 Preferred methodology DCF, EV/EBITDA, PE Valuation 3.22 Total revenue 2,328 2,440 2,293 2,600 2,837 DCF valuation inputs EBITDA Rf 4.30% 10-year rate 4.30% Associate income Rm-Rf 6.00% Margin 3.0% Depreciation (84.4) (91.2) (85.6) (100.0) (114.4) Beta 1.32 Kd 7.30% EBITA CAPM (Rf+Beta(Rm-Rf)) 12.2% Ke 12.2% Amortisation/impairment (10.6) (10.3) (10.3) (10.3) (10.3) E/EV*Ke+D/EV*Kd(1-t) NPV cash flow (A$m) EBIT Equity (E/EV) 65.4% Minority interest (A$m) 0.0 EBIT(incl associate profit) Debt (D/EV) 34.6% Net debt (A$m) Net interest expense (48.0) (46.0) (46.7) (45.5) (45.7) Interest rate 7.3% Investments (A$m) 3.6 Pre-tax profit Tax rate (t) 29.8% Equity market value (A$m) Income tax expense (67.0) (67.8) (81.5) (100.2) (110.4) WACC 9.8% Diluted no. of shares (m) After-tax profit DCF Valuation (A$) 3.36 NPAT (normalised) Multiples 2015A 2016F 2017F 2018F Significant items (171.3) (19.9) Enterprise value (A$m) 6, , , ,163.8 NPAT (reported) (24.0) EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) Cash flow (A$m) 2014A 2015A 2016F 2017F 2018F PE (normalised) (x) EBITDA PEG (normalised) (x) Change in working capital 8.3 (10.7) (4.9) Price/Book (x) Net interest (pd)/rec (199.0) (65.1) (46.7) (45.5) (45.7) Taxes paid (8.7) (10.7) (12.9) (15.9) (55.2) At target price 2015A 2016F 2017F 2018F Other oper cash items EV/EBITDA (x) Cash flow from ops (1) PE (normalised) (x) Capex (2) (155.5) (362.8) (500.8) (503.4) (267.2) Disposals/(acquisitions) Comparable company data (x) 2016F 2017F 2018F Other investing cash flow (2.8) Ramsay Health Care EV/EBITDA Cash flow from invest (3) (158.3) (279.8) (354.5) (323.4) (252.2) Y/E June EV/EBIT Incr/(decr) in equity 0.0 1, PE Incr/(decr) in debt 49.4 (1,503.9) PEG Ordinary dividend paid 0.0 (57.2) (132.5) (145.5) (170.6) Sonic Healthcare EV/EBITDA Preferred dividends (4) Y/E June EV/EBIT Other financing cash flow PE Cash flow from fin (5) (95.5) (170.6) PEG Inc/(decr) cash ( ) Per share data 2015A 2016F 2017F 2018F Equity FCF (1+2+4) 2.4 (61.0) (149.0) (62.5) No. shares 1, , , ,732.1 EPS (normalised) (cps) Balance sheet (A$m) 2014A 2015A 2016F 2017F 2018F EPS (dil. normalised) (cps) Cash & deposits Dividend per share (cps) Trade debtors Franking (%) 0% 0% 0% 50% Inventory Dividend payout ratio (%) 70.1% 69.9% 69.3% 69.9% Investments Dividend yield (%) 3.0% 3.3% 4.1% 4.5% Other intangible assets 1, , , , ,006.7 Growth ratios 2015A 2016F 2017F 2018F Fixed assets 1, , , , ,054.0 Sales growth 4.8% -6.1% 13.4% 9.2% Other assets Operating cost growth 4.1% -8.6% 12.3% 9.0% Total assets 3, , , , ,866.4 EBITDA growth 8.7% 7.2% 18.2% 9.9% Short-term borrowings 2, EBITA growth 8.9% 11.3% 18.6% 8.8% Trade payables EBIT growth 9.4% 11.7% 19.2% 9.0% Long-term borrowings , , , ,367.9 Reported NPAT growth % 25.5% 22.9% 10.2% Provisions Normalised NPAT growth 17.5% 11.0% 22.9% 10.2% Other liabilities Reported EPS growth % 25.5% 22.9% 10.2% Total liabilities 3, , , , ,342.9 Normalised EPS growth 11.7% 11.0% 22.9% 10.2% Share capital 1, , , , ,697.2 Asset turnover 15.2% 14.7% 12.7% 13.6% Other reserves (249.2) (259.6) (259.6) (259.6) (259.6) EBITDA margin 15.9% 18.2% 18.9% 19.1% FCTR EBIT margin 11.8% 14.0% 14.7% 14.7% Unrealised gains/losses Net profit margin 7.1% 8.4% 9.1% 9.2% Retained earnings (519.9) (131.9) (74.0) (1.6) 76.6 Return on net assets 12.4% 13.6% 15.7% 16.6% Other equity Net debt (A$m) Total equity , , , ,514.2 Net debt/equity 41.6% 46.3% 46.1% 43.6% Minority interest (0.0) (0.0) (0.0) (0.0) (0.0) Net interest/ebit cover (x) Total shareholders' equity , , , ,514.2 ROIC 7.6% 6.7% 7.4% 7.7% Total liabilities & SE 3, , , , ,857.1 Current ratio (x) Receivables turnover (x) Payables turnover (x)

9 Figure 7: Financial summary- JHC Japara Healthcare Year end June Closing price (A$) 2.90 Target price (A$) 3.09 Divisional sales Preferred methodology DCF Valuation 3.09 Total revenue DCF valuation inputs EBITDA (1.2) Rf 5.25% 10-year rate 5.25% Associate income Rm-Rf 6.00% Margin 2.0% Depreciation (0.8) (4.9) (5.6) (6.1) (6.7) Beta 1.41 Kd 7.25% EBITA (2.0) CAPM (Rf+Beta(Rm-Rf)) 13.7% Ke 13.7% Amortisation/impairment (0.8) (4.9) (5.6) (6.1) (6.7) E/EV*Ke+D/EV*Kd(1-t) NPV cash flow (A$m) #N/A EBIT (2.8) Equity (E/EV) 80.0% Minority interest (A$m) #N/A EBIT(incl associate profit) (2.8) Debt (D/EV) 20.0% Net debt (A$m) Net interest expense (0.2) (1.6) (2.0) (2.0) (2.0) Interest rate 7.3% Investments (A$m) 0.0 Pre-tax profit (3.0) Tax rate (t) 30.0% Equity market value (A$m) Income tax expense 0.1 (10.5) (13.9) (16.5) (18.2) WACC 12.0% Diluted no. of shares (m) After-tax profit (2.9) DCF Valuation (A$) 3.05 NPAT (normalised) (2.9) Multiples 2015A 2016F 2017F 2018F Significant items Enterprise value (A$m) NPAT (reported) (2.9) EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) Cash flow (A$m) 2014A 2015A 2016F 2017F 2018F PE (normalised) (x) EBITDA (1.2) PEG (normalised) (x) (0.0) Change in working capital Price/Book (x) Net interest (pd)/rec (0.4) Taxes paid 0.1 (10.5) (13.9) (16.5) (18.2) At target price 2015A 2016F 2017F 2018F Other oper cash items EV/EBITDA (x) Cash flow from ops (1) PE (normalised) (x) Capex (2) (4.7) (62.0) (173.0) (46.5) (55.8) Disposals/(acquisitions) Comparable company data (x) 2016F 2017F 2018F Other investing cash flow Regis Healthcare EV/EBITDA Cash flow from invest (3) (4.7) (62.0) (173.0) (46.5) (55.8) Y/E June EV/EBIT Incr/(decr) in equity PE Incr/(decr) in debt PEG Ordinary dividend paid (0.0) (15.7) (31.5) (32.8) (34.1) Sonic Healthcare EV/EBITDA Preferred dividends (4) Y/E June EV/EBIT Other financing cash flow PE Cash flow from fin (5) PEG Inc/(decr) cash ( ) (88.4) Per share data 2015A 2016F 2017F 2018F Equity FCF (1+2+4) (3.4) (20.2) (116.9) No. shares EPS (normalised) (cps) Balance sheet (A$m) 2014A 2015A 2016F 2017F 2018F EPS (dil. normalised) (cps) Cash & deposits Dividend per share (cps) Trade debtors Franking (%) n.a. n.a. n.a. n.a. Inventory Dividend payout ratio (%) 96.6% 97.2% 85.0% 76.7% Investments Dividend yield (%) 3.7% 4.1% 4.3% 4.5% Other intangible assets Growth ratios 2015A 2016F 2017F 2018F Fixed assets Sales growth 475.6% 18.2% 12.3% 10.7% Other assets Operating cost growth 358.6% 17.0% 11.3% 10.3% Total assets , , ,154.0 EBITDA growth % 17.4% 16.7% 12.6% Short-term borrowings EBITA growth % 17.7% 17.4% 12.8% Trade payables EBIT growth % 18.0% 18.3% 13.1% Long-term borrowings Reported NPAT growth % 12.5% 19.1% 15.2% Provisions Normalised NPAT growth % 12.5% 19.1% 15.2% Other liabilities Reported EPS growth % 12.5% 19.1% 15.2% Total liabilities Normalised EPS growth % 12.5% 19.1% 15.2% Share capital Asset turnover 1.4% 7.1% 7.8% 8.2% Other reserves EBITDA margin 18.2% 18.1% 18.8% 19.1% FCTR EBIT margin 14.7% 14.7% 15.5% 15.8% Unrealised gains/losses Net profit margin 10.4% 9.9% 10.5% 10.9% Retained earnings (2.8) Return on net assets 7.7% 9.1% 10.6% 11.8% Other equity Net debt (A$m) Total equity Net debt/equity -10.2% 6.9% 2.4% -1.3% Minority interest Net interest/ebit cover (x) Total shareholders' equity ROIC 5.3% 6.5% 6.5% 7.6% Total liabilities & SE , , ,153.9 Current ratio (x) Receivables turnover (x) Payables turnover (x)

10 Figure 8: Financial summary- MVF Monash IVF Year end June Closing price (A$) 1.53 Target price (A$) 1.79 Divisional sales Preferred methodology Blended DCF: PE Valuation 1.79 Total revenue DCF valuation inputs EBITDA Rf 5.25% 10-year rate 5.25% Associate income Rm-Rf 5.80% Margin 2.0% Depreciation (2.4) (3.1) (3.7) (4.1) (4.5) Beta 1.60 Kd 7.25% EBITA CAPM (Rf+Beta(Rm-Rf)) 14.5% Ke 14.5% Amortisation/impairment (0.5) (0.3) (0.4) (0.5) (0.5) E/EV*Ke+D/EV*Kd(1-t) NPV cash flow (A$m) #N/A EBIT Equity (E/EV) 60.0% Minority interest (A$m) #N/A EBIT(incl associate profit) Debt (D/EV) 40.0% Net debt (A$m) 97.0 Net interest expense (5.1) (4.7) (5.3) (5.3) (5.3) Interest rate 7.3% Investments (A$m) 0.0 Pre-tax profit Tax rate (t) 30.0% Equity market value (A$m) Income tax expense (9.7) (9.3) (10.9) (12.5) (14.2) WACC 10.7% Diluted no. of shares (m) After-tax profit DCF Valuation (A$) 1.76 NPAT (normalised) Multiples 2015A 2016F 2017F 2018F Significant items Enterprise value (A$m) NPAT (reported) EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) Cash flow (A$m) 2014A 2015A 2016F 2017F 2018F PE (normalised) (x) EBITDA PEG (normalised) (x) (5.4) Change in working capital (8.6) Price/Book (x) Net interest (pd)/rec (5.1) (4.7) (5.3) (5.3) (5.3) Taxes paid (9.7) (9.3) (10.9) (12.5) (14.2) At target price 2015A 2016F 2017F 2018F Other oper cash items EV/EBITDA (x) Cash flow from ops (1) PE (normalised) (x) Capex (2) (216.3) (29.3) (5.3) (6.4) (7.6) Disposals/(acquisitions) Comparable company data (x) 2016F 2017F 2018F Other investing cash flow Virtus Health EV/EBITDA Cash flow from invest (3) (216.3) (29.3) (5.3) (6.4) (7.6) Y/E June EV/EBIT Incr/(decr) in equity PE Incr/(decr) in debt PEG Ordinary dividend paid 0.0 (10.8) (17.2) (19.1) (21.1) Sonic Healthcare EV/EBITDA Preferred dividends (4) Y/E June EV/EBIT Other financing cash flow PE Cash flow from fin (5) (5.5) (17.2) (19.1) (21.1) PEG Inc/(decr) cash ( ) (30.8) 1.2 (1.6) Per share data 2015A 2016F 2017F 2018F Equity FCF (1+2+4) (179.1) No. shares EPS (normalised) (cps) Balance sheet (A$m) 2014A 2015A 2016F 2017F 2018F EPS (dil. normalised) (cps) Cash & deposits Dividend per share (cps) Trade debtors Franking (%) n.a. n.a. n.a. n.a. Inventory Dividend payout ratio (%) 75.0% 67.4% 65.4% 63.4% Investments Dividend yield (%) 4.6% 4.9% 5.3% 5.9% Other intangible assets Growth ratios 2015A 2016F 2017F 2018F Fixed assets Sales growth 9.6% 25.2% 10.0% 10.0% Other assets Operating cost growth 15.9% 28.5% 9.0% 9.1% Total assets EBITDA growth -2.3% 17.8% 12.3% 12.2% Short-term borrowings EBITA growth -4.3% 17.6% 12.5% 12.4% Trade payables EBIT growth -3.8% 17.6% 12.6% 12.4% Long-term borrowings Reported NPAT growth -3.0% 18.9% 14.4% 14.0% Provisions Normalised NPAT growth -3.0% 18.9% 14.4% 14.0% Other liabilities Reported EPS growth -3.0% 18.4% 13.4% 13.5% Total liabilities Normalised EPS growth -3.0% 18.4% 13.4% 13.5% Share capital Asset turnover 10.8% 11.1% 13.6% 14.4% Other reserves (136.9) (137.3) (137.3) (137.3) (137.3) EBITDA margin 31.1% 29.3% 29.9% 30.5% FCTR EBIT margin 28.4% 26.7% 27.3% 27.9% Unrealised gains/losses Net profit margin 17.1% 16.3% 16.9% 17.5% Retained earnings (160.9) (147.0) (138.8) (128.8) (116.7) Return on net assets 24.6% 27.4% 29.0% 30.3% Other equity Net debt (A$m) Total equity Net debt/equity 67.3% 64.7% 55.4% 45.8% Minority interest Net interest/ebit cover (x) Total shareholders' equity ROIC 16.8% 17.3% 18.7% 20.9% Total liabilities & SE Current ratio (x) Receivables turnover (x) Payables turnover (x)