Australia Healthcare: Limited credit risk but rising yields likely to constrain SHL growth; Downgrade to Neutral

Following an increase in bond yields across Australia, the US and Europe we review implications for our coverage. Key considerations include sensitivity to changes in interest rates and potential changes to capital management strategy. We believe our covered companies are in generally good shape given prudent hedging policies, with SHL, RHC, CSL and IDX screening relatively higher on gearing levels. Capital allocation decisions however might change. For SHL, the higher exposure to floating rates (~48% in FY26/40% in FY25) and recent refinancing are likely to lift average cost of debt, which we anticipate the FY27 guidance largely accommodates for. Given the potential for debt costs to remain elevated, back office investment flagged at the August result and growing risk of funding cuts, we now anticipate a deferral of bolt on acquisitions, impacting our FY28/29 EPS by -4%/-7%. We reduce our valuation by -19% reflecting a multiple more in line with peers (~14x EV/EBIT). With the stock tr