Shares in Primary Health Care Limited (ASX: PRY) rebounded from a seven-month low after it posted higher profits and released details of its strategic review that includes establishing a property trust to help fund its business expansion.
The medical facilities operator jumped 2% to $4.54 in early trade as management said it was looking to establish five large-scale medical centres in the next 18 months to help it achieve a pre-tax return on invested capital (ROIC) of 15-20% on all new centres.
Primary's strategic review showed that these super centres, which provide a one-stop shop of medical services from general practitioners to diagnostics and pathology, earn superior returns, and the group will create a real estate investment trust (REIT) to help fund the building and operation of new centres.
This move will significantly ease pressure on Primary's balance sheet, which holds around $1.2 billion in debt.
But the group isn't only targeting super centres as a means to grow its footprint. Primary is looking to establish offshore pathology facilities to capitalise on its expertise as Australia's market leader in this field as growth in the local market is becoming more difficult to come by.
This isn't necessarily the case for the imaging business as this industry is regarded as a high growth market. You can see evidence of this in Capitol Health Ltd's (ASX: CAJ) full year result announcement yesterday.
Investors are also taking heart from Primary's drive to improve net profit margin by 2-3% as all of its business units experienced a margin squeeze in the previous financial year.
While group revenue jumped 6.2% to $1.6 billion, underlying net profit increased a more modest 3.9% to $119.1 million for 2014-15.
The exception to the margin squeeze was Primary's Medical Director clinical software business, but that's only because of lower depreciation and amortisation charges. If this was removed, the division's margin would be flat at best.
Management is counting on improved efficiencies in attracting and retaining medical practitioners, capital spending reviews and the establishment of the REIT to drive the expected improvement in margins.
Investors also cheered Primary's better-than-expected dividend payment with the group declaring an 11 cents distribution to take its full year dividend to 20 cents a share. Most analysts were tipping an 18 cents payout.
Analysts had been expecting an 18% increase in Primary's earnings per share for the current financial year, but that's likely to change following today's news.
It is not easy to work out that these changes might be due to the lack of details about the REIT and I think investors are better off sitting on the sidelines until there are more details.
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