We derive our 12-month target price of $3.80 using a 2-stage DCF. We use a WACC of 8.2% (risk-free rate of 3.0%, equity beta of 1.00), an explicit forecast period of 7 years and a terminal growth rate of 2.5% thereafter in our DCF. We note that the Australian pathology market has grown at an average of ~4.4% pa in the last decade.

The Australian pathology industry is subject to a number of regulations covering a number of aspects including funding (through the Medicare Benefit Scheme (MBS)). Regulatory changes could have an unpredictable impact on earnings. Other risks include deterioration of relationships with referring practitioners or private health insurance funds, potential internalization of pathology services by clients, cyber security risks, higher cost of debt and equity capital, and difficulty in integrating acquisitions. Should the impact of these factors be greater than expected, the stock may have difficulty in achieving our earnings estimates and target price. Conversely, should any of these factors prove to have less of an effect than we anticipate, the stock may outperform our target price.