Is healthcare finally turning the corner?

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Healthcare stocks used to be much loved by investors, but have fallen out of favour in Australia and around the world over the past year. Healthcare was the worst performing sector in the ASX last financial year – in both large and small caps. However, things seem to be starting to turn. Large cap healthcare stocks, including CSL, Cochlear and Resmed have been bouncing back, and a similar dynamic is playing out in small caps. Could the long-term structural tailwinds of an ageing population and preventative medicine be starting to reassert themselves as short-term headwinds dissipate?

In this podcast, IML small-mid cap portfolio managers, Marc Whittaker and Lucas Goode, talk to Natixis Investment Managers’ Daniel Shelest about the recent performance and longer-term prospects for Australian healthcare stocks. They also cover:

• Key takeaways from the earnings results by Integral Diagnostics’ (IDX) and Australian Clinical Labs
• What is driving the massive wave of takeover activity in Australian small and mid-caps
• Potential catalysts to close the valuation gap between small and large caps

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Lightly edited transcript – Recorded on 25 August 2026

Daniel: Hello and welcome to Navigating the Noise, a podcast by Natixis Investment Managers, where we bring you insights from our global collective of experts to help you make better investment decisions. I’m Daniel Shelest and today I’m joined by Marc and Lucas, portfolio managers in IML’s Small Cap Team, to discuss reporting season at the smaller end of the market, with a particular focus on healthcare and takeovers. Marc, Lucas, gents, thanks for joining us today.

Marc: Thanks for having us, Daniel. Happy to chat, and it’s been a very interesting reporting season so far, hasn’t it, Lucas?

Lucas: It has been, always, always tumultuous, but this year feels particularly so.

Daniel: Love it. Well, let’s get into it. Marc, if you don’t mind, let’s touch on healthcare. I know you’ve been a big advocate for the healthcare sector with its favourable long-term tailwinds. And you also hold several stocks across IML’s small and mid-cap. But it’s been a tough time, hasn’t it? I think in the year to July 2026, healthcare was the worst performing sector in the ASX small ordinaries, down something like 33%. What do you think’s driven that and are you still positive on healthcare’s long-term prospects?

Marc: We are, Dan. I’m very happy to talk about healthcare, and I can talk about it all day long if you like. But look, for us, it’s a sector that’s really, as you mentioned, has tremendous long-term structural tailwinds. Now, the markets are very obsessed with the short term, and in the short term, the sector has had some headwinds in terms of costs rising faster than revenues. And the real focus for the market has been the operating margins of the operators in that healthcare space.

But interestingly enough, and essentially in line with our expectations, what we’ve seen in the current reporting season is that the key names that we hold in small-cap healthcare, namely Australian Clinical Labs and Integral Diagnostics, have really started to report an improving operating margin outlook. So that’s been really encouraging and the share prices have actually reacted quite strongly over the last week or so.

What’s really driving that is, revenue has never been a problem for this sector. You’ve got government-mandated revenues coming in. You’ve got the Medicare Benefits Scheme basically underpins the revenue growth for these businesses. Growing populations, an ageing population, and the increasing use of medicine as a preventative diagnostic tool — as opposed to just responding to a problem — it’s actually getting in early before health issues become more serious. So those tailwinds are very strong.

The issue has been costs, and I think, Lucas, you agree, the ability for these businesses to get those costs under control has been a bit of a challenge more recently, but that’s starting to change.

Lucas: Yeah when the market’s been so focused on those near-term margin impacts or headwinds from labour, cost, inflation, etc., it’s almost missing the forest for the trees on the long-term growth. Now that the near-term margins look a bit healthier, all of a sudden the market is once again focusing on the long-term potential for these businesses.

Daniel: Very interesting. All right, well, let’s touch on some individual stocks, if you don’t mind. I think Integral Diagnostics has been a pretty long-term holding of yours and I believe it reported today. What did you learn and what do you think are the most important points that investors should pay attention to from the result?

Marc: Yeah, so Integral Diagnostics, or IDX, is the stock code. It’s the second-largest radiology business in Australia and also in New Zealand. So, a very strong market position, very strongly exposed to those sort of long-term tailwinds. They had their result today — did actually pre-release the result a couple of weeks ago. So the market was really looking for the devil in the detail today with the result this morning.

Really, what we’re seeing with IDX is there’s a new CEO in place. So the former CEO, Ian Kadish, has retired, and we’ve got a new CEO in place, Jason Martinez, who is actually out of I-MED, which is the largest radiology player in the country. So what we’ve seen is a very senior executive from I-MED come and join IDX.

Really today was an opportunity for the market to get his perspective on the business, his thoughts about its quality, the opportunities in front of it and how he sees the business going forward and where he can take it. We’ve actually met with Jason quite some weeks ago prior to him starting officially. So we managed to get an insight into the way he was thinking and the way he was thinking about the business. But for the wider market, today was really a chance for them to meet him for the first time and hear what he had to say.

I think a lot of what he had to say, A, made a lot of sense. I mean, certainly from our point of view, there was nothing sort of new in terms of what he had to say. But in terms of the systematic way he went about focusing on a number of key issues for that business, I think it was very encouraging. Really focused on revenue management, really focused on margin improvement — which are all the things that we’ve been talking about — and really focused on capital management and allocation.

Just the way he laid that out in a very systematic, easy-to-understand way, I think has given the market some encouragement that the outlook for that business is, in fact, quite encouraging—not the impaired sort of outlook that perhaps the share price was implying, you know, this time a few months ago.

Lucas: Yeah, I think there’s been a perception in the market, or I say perception, but it’s been the reality, that IDX has been under-earning compared to peers, like I-MED, Jason’s old shop. But I think the market lost confidence in existing management, in the previous management team, to deliver that improvement. I mean, top line has never been the issue. Radiology revenues are actually growing extremely strongly because, as Marc said, it’s preventative medicine.

Unfortunately, with IDX, a lot of those benefits were accruing to the highly paid radiologists rather than to IDX shareholders. And I think hearing a new voice has been helpful for the market.

Marc: That’s right. So the outlook for that business, they’re talking to operating margins, EBITDA margins of above 21%, which is where the business should be earning. And so that’s encouraging. And I think just the fact he’s come from a very good former employer, from a senior role, and has really driven the margin improvement that was evident in I-MED previously — bringing that playbook, that template to IDX, I think is very encouraging. And as Lucas says, and as I’ve highlighted, it’s a pretty simple game in terms of what needs to be done.

Execution is always obviously the biggest challenge, but he seems eminently able and capable to be able to sort of make some early gains, and I won’t say easy wins, but certainly some wins in that regard. So, really looking forward to the way he can think about the business and just capital allocation. Are we spending capital in the right areas? Does our footprint need to be quite so big? They’ve got a business in New Zealand, which he’s highlighted may be subject to a review and perhaps a potential divestment. It’s been a bit of a bugbear for management previously, just given some of the structural changes down there.

So, lots of good things to like about that business. And as we say, trading on an 8 times EV/EBITDA multiple too. So, if we look at potential takeovers and I guess the wave of takeover activity we’ve seen, this is a business trading on 8 times EBITDA. The private market is paying up to 12, 13 times for these sorts of businesses. So for me, or for us, it really feels like a very obvious candidate for takeover potential, particularly if Jason can get the business working the way it should be working. I think there’s a lot to like about, A, the valuation, B, the company’s position, and C, the outlook for the business as well.

Daniel: There we go. That’s some good intel. I might actually ask you about one of the other holdings, ACL, or Australian Clinical Labs, has had another pretty good result and its share price is up. Do you think that this is a turning point for the sector, or is it based more on individual results?

Lucas: I think it’s a bit of A, a bit of B, just to sit on the fence there, Daniel. But ACL was caught in a bit of a pincer movement in recent years — or the whole pathology sector has been. On the revenue side, the government was cutting funding for some major tests. And on the cost side, they kept passing through big Fair Work wage increases that were above the rate of inflation. It was making it very hard for these businesses to grow their earnings.

Now, ACL actually did manage to grow their earnings, which was really a Herculean effort when you compare it to the other listed players, Healius and Sonic. But I actually think that the travails of their competitors, particularly Healius, have often dragged down ACL because no one can quite believe that the third-largest player has much higher margins than the number one and two players.

So, you know, it’s a bit different to IDX, in that I think ACL has actually been extremely well managed. They’ve probably just caught the rough end of the stick a little bit from government, but pathology testing volumes continue to go up. I mean, it’s preventative medicine, and it’s a far higher return on investment for public health spending than just about anything else you can do.

So, we do think the long-term tailwinds are there and that ACL is well-placed to participate in industry consolidation. Because, as I say, ACL’s margins are okay, not fantastic, but okay. Their competitors’ margins are horrendous. So, there should be an opportunity either for industry repair through better funding or for a consolidation with ACL to be at the heart of that. So, that’s where we think the next leg of growth comes from. The stock’s still relatively inexpensive, even with the 25% return this month. But yeah, we do think this is the start of good things to come for ACL.

Marc: Yeah, and pathology is a very good, cash-generative industry. So, you know, a very strong balance sheet, and as Lucas highlights, the potential for consolidation. Whether that’s a number-four player merging with an ACL, or a number-three player, or a number-two player, I think it’s all about volume, right?

Utilisation, getting as much volume through those very fixed-cost laboratories that any pathology player operates. So the more volume you can pump through those labs, the better the efficiencies, the better the operating leverage, and the better your operating margins.

Lucas: Yeah, you need scale in pathology. It’s not like radiology where a really high-earning radiologist might leave and set up shop themselves. Pathologists aren’t going to leave and start their own testing business because they don’t have any collection centres.

Marc: That’s right. I think one of the potential attractions for pathology is indexation on pathology revenues, because as an industry, they generally don’t get Medicare indexation. So pathology is a bit of a poor cousin when it comes to the health services providers. Unlike radiology and other parts of the healthcare market where you do get indexation, their revenues are typically capped or flat, and it’s really about efficiencies and operating leverage and so forth.

Lucas: And as I touched on, ACL is in a great position moving forward because you’ve got two of the four largest players currently unprofitable. So either the government needs to fix the funding so that those players can become profitable, in which case ACL’s margins will improve, or, if they don’t change the funding model, those two players are probably going to hit the wall, which provides some great consolidation opportunities for ACL.

Daniel: There you go. It’s been a big theme that’s come out of this reporting season and look, quite a few of your stocks have had takeover offers. What do you think is driving this? Is there some commonality between the companies which have made them takeover targets?

Lucas: Well, what’s driving it within our portfolio, Daniel, is that we are long-term fundamental investors who own a lot of stocks that are undervalued. But look, I do think what you’re seeing from a larger, I guess, macro point of view is that the ASX is doing a horrendous job pricing smaller companies — particularly those that don’t have fantastic earnings momentum, or maybe are going through teething issues, or facing cyclical headwinds. And if the market isn’t going to value these companies appropriately, then someone else will. And for the most part at the moment, that’s private equity, who are willing to take a long-term view.

I mean, in some ways, it’s a real damning indictment of the way the public markets are structured now that private equity can build themselves leveraged buyout models with 20% returns and pay 40% premiums for listed companies. But it’s because they’re not so fixated on the next half-yearly report. So, you know, I think unfortunately or fortunately, depending on which way you look at it, this is going to continue to be a feature of the market and we’re going to continue to see de-equitisation of the Australian market, particularly outside the top 100.

Marc: Yeah, so it’s interesting, Lucas, isn’t it? If you look at our Future Leaders Fund at the moment, almost 20% of the fund is actually subject to, or under some sort of speculation of, a takeover. So it’s quite a high percentage. And in our Smaller Companies Fund, it’s something like 14 or 15%. So a lot going on, but it really talks to the valuation and the quality, I think, in the portfolios.
And we’re not talking very sort of underknown or unappreciated small caps. We’re talking the likes of, you know, Cleanaway in the mid-caps, or Reliance Worldwide in the smalls, the likes of SkyCity or Equity Trustees (EQT Holdings), Event Cinemas (EVT Limited), Vault Minerals in the gold mining space. So, very, very prominent names, but also companies where the market probably isn’t fully reflecting the true value of these particular stocks.

Lucas: Yeah, but the market just gets frustrated so quickly with stocks these days, particularly outside the top 100. I mean, you’ve got index funds or super funds that are effectively price-agnostic buyers—it’s just momentum. And then so many active managers are so concerned around their short-term performance, because they don’t want to lose mandates or what have you, that they’re not willing to, I guess, go against the grain and invest out of cycle in the way that possibly at IML we are. And, you know, as a result, in some ways, it’s disappointing when companies that you know and love, and think have a lot of long-term potential, do get taken off you. But obviously, you do get the nice short-term sugar hit.

Daniel: All righty. Well, just to wrap it up, looking ahead now, smaller companies have had a pretty tough time over the past year, and small industrials in particular were down around 9% over the year to July. What do you think could be a catalyst for smaller companies to perform better, and you know, how are your portfolios positioned?

Marc: Well, I think, Daniel, just focusing on that quality and value angle has held the portfolio in pretty good stead today, and I think that’s just our ongoing focus really. As Lucas highlights, we’re likely to lose a number of names to takeovers, but all that means is we’re going to find the next level of companies which we think fit that quality and value bucket.

So what’s going to move the sector more generally? I think obviously just a general sense that the economy is turning around, or interest rates have peaked, and the consumer starts to look a little bit, I guess, less pessimistic about the outlook. That’s going to be a critical turning point. But in terms of what we can control and in terms of what we own, it’s really about that quality and valuation balance.

And what’s interesting is that we’re still finding plenty of opportunities. We’re losing companies, yes, to takeovers, and we’ve been very disciplined on valuation as well. When companies we own have hit a valuation which we think is full, we’ve been very happy to sell those positions out, and we’re managing to rotate to what we think are even better quality and value opportunities. So that’s ongoing.

And reporting season always throws up opportunities. We’ve managed to put in a couple of new names in the portfolio which we think are interesting. Some are sort of small positions to start with, but we’re just starting to rotate some of those names, and there are plenty of new opportunities that we can find at the moment.

Lucas: Yeah, our conviction will always be that fundamentals win out in the end, and that’s reflected in the way we manage money here at Investors Mutual. And, you know, Marc touched on some of the potential catalysts that could cause that dispersion to reverse, but what we do know is, even if we don’t know what the catalyst is, it will reverse at some stage. That rubber band can only stretch so far; it eventually snaps back. And whether it’s interest rates, an improving domestic economy, or something external that comes out of left field, the reality is that small industrials have been in a bear market compared to larger companies and resources for some time now. And we know that that won’t continue forever. So in the meantime, we’re just going to continue to buy great companies at discounts.

Marc: With attractive yields as well. There are plenty of very good dividend-paying stocks out there at the moment. GWA is one we just added to the portfolio. It’s a yield of 7 to 8% fully franked. And you know, a good quality business. Growth has been a little bit challenging, but a really good quality business, good management team, controlling the controllables, and a 7 to 8% dividend, fully franked. So opportunities like that are there. And if we can get paid to hold these businesses while we wait for the re-rate, or the market to turn around, or the market to start to appreciate the value on offer, then well and good.

Daniel: Fantastic. All righty. Well, thank you very much, Marc and Lucas. I know it’s a busy time for you and you’re still stuck in the thick of reporting season for smaller companies, so best of luck with the rest of the month. And, of course, thank you to our listeners for tuning in. Please do tune in again soon to hear more from the team at IML, as well as others in our global collective of experts.

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