Speaker A
[Music] [Applause] [Music] Hello everyone, my name is Ben McNean from Montgomery Investment Management, and welcome to this week's video insights. The increasing age of the Baby Boomers has made healthcare a popular investment theme. While a growing market certainly makes for a favorable investment dynamic, it does not in itself guarantee profitability or sustainable returns. Investors that want exposure to this market shouldn't be allocating capital in a scattergun approach. Rather, you should be targeting the sectors and companies with the best fundamentals, prospects, and value for money. Within the healthcare sector, there are listed companies in biotechnology, equipment manufacturers, pharmaceuticals, and service providers. In today's insight, the quality of the main member companies will be assessed according to the return on equity, gearing, and profit margins. Now, when examining the table, it is striking to see the quality of the biotechs and equipment manufacturers. You'll know that CSL, Cerx, Cocka, and ResMed each have a return on equity above 20%, high profit margins, and strong balance sheets. And there was a clear reason to explain each company's financial position, quality, and control of their intellectual property. ResMed specializes in sleep. Cocka provides hearing to the deaf. CSL provides life-saving vaccines, while CeX is showing promising results in the treatments of liver cancer. These are all offerings that customers would pay a premium for. Now, considerable time and investment is required to generate these profit margins. You will know that Miso Blast, a developer of biological therapies for regenerative medicine, is unprofitable, and yet the company has a market capitalization of $1.8 billion, which has tripled their shareholder funds. High profit margins will also attract competitors, which means substantial investment is required to maintain strong positioning and pricing power. Cockle in particular has recently experienced considerable pressure in this regard. Now, looking at the healthcare providers, the quality operators are Sonic Healthcare, which focuses on pathology, Ramsey Healthcare, a builder and operator of hospitals, and Verus, the owner of facility clinics. Our pick of this bunch is Ramsey. You may wonder why, given it has a high return on equity but low profit margins and high gearing. Operating hospitals is a difficult game, evidenced by the lower margins, but Ramsey is very good at it, and because of this reputation, it is favored over many of its competitors when tendering. This dynamic makes for a very strong value proposition, given the sheer scale of domestic and international opportunities in this sector. Now, when you don't control the intellectual property, it's hard to generate value. This is the case with Sigma Pharmaceuticals and Main Farmer. These are manufacturers and distributors of generic products through wholesale and pharmaceutical networks. The companies do not own the IP, just the right to distribute, which means they have thin margins and not compelling returns on equity. So that's just a taste of what to look for when diagnosing the well-being of healthcare companies. The Montgomery funds own CSL, Ramsey, Rmid, and CeX Medical, and detailed analysis is available on our blog, which I encourage you to follow on Facebook and Twitter. [Music]
