Here’s why Morningstar reckons the ASX healthcare sector is on road to recovery

• Morningstar sees ASX healthcare sector as fair value with some buying opportunities
• Healthcare stocks viewed as defensive and insulated from rising inflation
• Morningstar has several healthcare picks for 2023 with last year’s headwinds likely to subside

After being off colour with investors in 2022, ratings house Morningstar reckons the ASX health sector is likely to start recovering in 2023.

Morningstar’s Australia and New Zealand Equity Market Outlook Q1 2023 showed the healthcare sector underperformed the Morningstar Australia Index in the December quarter.

Indeed, the S&P/ASX 200 healthcare index (ASX:XHJ) fell 8.4% in 2022. But Morningstar healthcare equity analyst Shane Ponraj sees the sector as fairly valued on average and containing buying opportunities with just under a third of its coverage trading in four to five star territory.

“We generally view companies in our healthcare coverage as defensive and fairly insulated from rising inflation or a potential Australian recession due to the essential nature of the products and services provided,” he said.

“This broadly translates to pricing power and being able to pass on rising input costs to customers without a material impact on demand.

“We also do not expect a material adverse impact on profits from rising interest rates due to a lack of debt within the sector overall.”

Volatility remains as Covid-19 variants emerge

However, like any recovery Ponraj said there may be hurdles to jump along the way, particularly with a continued threat of new Covid-19 variants.

“While the path forward may be volatile, particularly if new coronavirus variants emerge, we still expect continued mean reversion for the temporary winners and losers of the pandemic,” he said.

“We expect the impact of coronavirus to continue subsiding overall given higher vaccination rates, expanding treatment options, and the general trend for variants to be less severe.

“As such, we anticipate current challenges including staff absenteeism and supply chain disruption to mostly resolve longer-term.

Picks for 2023

Ansell (ASX:ANN)

Operating in the personal protective equipment space (PPE) space, ANN’s larger single use medical gloves, surgical suits and PPE business soared during the first two years of the Covid-19 pandemic. However,  it’s now grappling with oversupply and falling margins.

Furthermore, ANN has said its industrial business was enduring softer sales in Europe and the US as orders were cut back amid a slowing economy.

However, the company maintained FY23 guidance at its AGM in November.

“We see margins expanding,” Ponraj said.

You can read more about Morningstar’s ratings system here.

ResMed (ASX:RMD)

The US-based company primarily provides cloud-connectable medical devices for the treatment of sleep apnoea, chronic obstructive pulmonary disease, and other respiratory conditions.

RMD’s sleep apnoea devices have been sold worldwide. The company gained enormous product share when its biggest competitor Philips had to recall millions of continuous positive airway pressure (CPAP) and ventilator machines in July 2021.

However, like many companies it has also experienced supply constraints but Ponraj is confident these will alleviate.

The ANN & RMD share price today:

Other health plays on Morningstar’s 2023 watch list

Also on its list for 2023 is diagnostics specialist Healius (ASX:HLS). The company announced in December it was selling its Montserrat Day Hospitals, an operator of 11 specialist short-stay hospitals and haematology/oncology clinics to Nexus Hospitals for an enterprise value of up to $138.6 million.

Blood products ASX healthcare giant CSL (ASX:CSL) has also been picked out by Morningstar. The biotech focuses on the research, development, and manufacturing of market products in three distinct areas – rare and serious diseases, vaccines, and iron deficiency/nephrology.

Wound care company Avita Medical (ASX:AVH) has seen its share price rise ~22% in the past month after announcing the submission of a premarket approval (PMA) supplement application to the US Food and Drug Administration (FDA) for its burn treatment RECELL system.

The supplement, if approved, will expand the indication of RECELL to include soft tissue repair.

Overvalued health care stocks

Meanwhile, health imaging company Pro Medicus (PME), pharmaceutical distribution company EBOS (ASX:EBO) and heavily shorted Nanosonics (NAN) were Morningstar’s most overvalued stocks in the sector.

Morgans senior analyst Scott Power is also confident the ASX healthcare sector may stage a recovery in 2023 and has a preferred basket of six stocks for the year. 

The author held shares in CSL at the time of writing this article.

The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees and do not represent the views of Stockhead. Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article. 

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