In turbulent times such as now, ASX healthcare shares have typically been in favour.
After all, even when high inflation or rising interest rates eat into spending power, consumers still want to take care of their physical and mental well-being.
According to LSN Capital Partners director Nick Sladen, there are also longer-term demographic forces at play.
"The healthcare industry has always been an attractive sector for investors given its defensive earnings stream that has compounded over the long term," Sladen told Livewire.
"The structural tailwinds from an [ageing] population that is spending an increasing amount on their health needs is a key driver of this earnings growth."
This structural growth, unfortunately, took a pause during the COVID-19 era, as even private health resources were diverted to fight the pandemic.
But now that the world is well and truly in the post-COVID epoch, it could be a case of everything old is new again.
"Looking ahead… we believe that current operating conditions will prove to be cyclical in nature, and we expect to see a return to long-term growth levels in the period ahead," said Sladen.
"Demand is further supported by the pandemic-related backlogs that require more intensive medical services as a result of late diagnosis of chronic illness."
So here are the three ASX shares from the health sector that Sladen's team loves right now:
Three 'compelling investment opportunities'
Sladen is particularly interested in the federal government's anti-inflation initiative to allow annual fee indexation in excess of 3.6% for certain health services.
"This covers most GP service items, and diagnostic [imaging] and will provide a revenue uplift for participants from the 1st of July 2023," he said.
"Given this favourable backdrop, we see some compelling investment opportunities in the healthcare space."
This leads to his first two picks.
"Capitol Health Ltd (ASX: CAJ) and Integral Diagnostics Ltd (ASX: IDX) are diagnostic imaging companies that are well positioned for a return to more normalised trading conditions."
Capitol Health, with branches in suburban Melbourne, commands about a 4% market share in the diagnostic imaging sector, according to Sladen.
"Over the past three years, it has successfully rolled out nine greenfield sites (three per year), integrated two major transactions and executed well on a cost-out program," he said.
"With a return to more normalised operating conditions, the company is on the cusp of delivering earnings growth in excess of 50% over the next two years and yet trades at a discount to historical averages."
The Capitol share price is down 17.7% over the past 12 months, while paying out a 3.6% dividend yield.
The imaging industry is hot for takeover activity too, Sladen noted, citing last year's acquisition of PRP Diagnostic by a consortium of private equity and superannuation funds.
The LSN Capital team's third pick is dental centre operator Pacific Smiles Group Ltd (ASX: PSQ).
According to Sladen, the company is set for "significant earnings growth".
"[The stock] is trading at a valuation that does not reflect the earnings momentum, strategic nature of the assets and growth opportunities ahead," he said.
"The group recently reported strong revenue trends (+17% pcp) from improving attendance levels and average spend per visit, which has had a positive impact on profitability for the 2H23."
Pacific Smiles shares have plunged 22% over the past year.
