Medical facilities operator Healthscope Ltd (ASX: HSO) is looking to make a make some big investments in capital projects this financial year to boost growth in 2016-17 after it unveiled operating earnings that were below market expectations.
Investors punished the company by sending the stock tumbling 2.7% to $2.50 in early trade even as the market staged a rebound into the black.
Management reported an 8.7% increase in operating earnings before interest, tax, depreciation and amortisation (EBITDA) to $388.3 million and a 4.8% improvement in revenue to $2.44 billion for the year ended June 30, 2015.
While the EBITDA number was 0.3% above the company's prospectus forecast, Healthscope's operating net profit of $153.1 million was around 10% below consensus forecast and its sales figure missed the company's guidance by 0.4%.
On the upside, Healthscope managed to improve its operating EBITDA margin by 50 basis points, or 0.5 of a percentage point, thanks to stronger demand for higher margin services and improvements to labour and procurement costs.
Its two biggest divisions, hospitals and international pathology, have recorded double-digit earnings growth for the period. Its hospitals enjoyed a 10.4% uplift in operating EBITDA to $327.6 million on the back of a 5.7% increase in revenue to $1.85 billion, while the latter division registered a 13.7% increase in EBITDA to $60 million as revenue rose 8.5% to $243.2 million.
Growth in the hospitals division could have been stronger if not for capacity constraints, although it has 10 construction projects underway that will deliver more beds and operating theatres late in the second half of 2015-16.
However, Healthscope is looking to step up its expansion. Management said it was looking to commission some large capital projects in the second half of the current financial year that will accelerate growth in 2016-17 and beyond. Some of these projects include its Gold Coast and Knox hospitals.
Healthscope sold its Australian pathology business in July 2015 for $105 million and earnings at its medical centres business were flat due largely to changes in the way it remunerates its doctors.
The company declared a final unfranked dividend of 3.7 cents a share to take its full year distribution to 7 cents a share.
The stock doesn't appeal to me on a yield or growth basis after it rallied 13% since listing late last year. It's reasonably defensive earnings and scope for further margin improvements are attractive, but I think there are better opportunities in the market.
