Private hospital and pathology operator Healthscope Ltd (ASX: HSO) released its interim results to the market this morning. Shares rose 5% at the open, reflecting shareholders' pleasure at a 52% increase in Net Profit After Tax.
Here's what you need to know:
- Revenue from continuing operations* rose 6% to $1,146m
- Net Profit After Tax (NPAT) from continuing operations* rose 52% to $97m
- Interim dividend of 3.5 cents per share (yield 1.5%), record date 10 March 2016
- Solid growth in Hospitals Australia and Pathology NZ division, offset by decline in 'Other' segment***
- Cash at bank of $156m**, current debt of $7m, total debt of $1.3bn
- Cash outflow of $60m in the half
*continuing operations excludes Pathology Australia division, which was sold in this half
** $53m of this is 'restricted cash' which can only be put towards the Gold Coast and Northern Beaches hospital projects
*** 'Other' segment consists of Australian Medical Centres, plus Pathology Malaysia, Singapore, and Vietnam
So What?
A decent result from Healthscope, offset by the fact that a significant chunk of the profit 'growth' came from a reduction in finance costs thanks to financing initiatives undertaken by management. Profit before finance costs, income tax, depreciation and amortisation was up a much more modest 6.4%.
Margins expanded slightly, and Healthscope renewed multi-year contracts with Medibank Private Ltd (ASX: MPL) and is on the cusp of renewing contracts with BUPA, which represents a vote of faith in Healthscope's operations. With the big insurers so heavily focussed on costs right now, a renewal of contracts with Healthscope could be seen as an indicator that the latter's businesses are run efficiently.
Ongoing construction projects are expected to result in a significant increase in the size of Healthscope's operations, with seven projects due to be completed by the end of this financial year, and another six due by the end of calendar year 2018.
Now What?
Healthscope has guided for further improvement throughout the year as a result of the group's ongoing focus on labour and procurement costs. Ongoing strong service delivery in New Zealand is expected to open a few doors for the company, with the potential for new contracts with District Health Boards.
Although the Medical Centres and south-east Asian pathology operations underperformed, management expects them to deliver growth over the medium term. There also is some potential for an impact to earnings (possibly positive or negative) as a result of the Commonwealth's ongoing review into the healthcare system.
If we double this half's earnings to estimate full-year profits, Healthscope looks to be trading on 24 times its full year earnings. Arguably the company is priced to account for its growth prospects, but with significant capacity expansion coming there could be some value remaining in Healthscope shares at today's prices.
