CRASH: Lifehealthcare share price plunges 37%

Lifehealthcare Group Ltd (ASX:LHC) share price plunges 37%

Mike King

Mike King is a Fool.com.au Investment Analyst and Writer. He caught the investing bug more than a decade ago, at a time when the U.S. had invaded Iraq and fear reigned in the markets. His initial success as the markets took off encouraged his passion and thirst for knowledge. With 13 years behind him at one of Australia's largest domestic banks, Mike's passion for stocks led him to join a boutique funds management firm, where he stayed for four years. A seven-year stint in equity research at one of the largest investment banks in the world followed that, giving Mike a thirst to pursue his passion further. Mike holds a Diploma in Applied Finance and Investment and a Graduate Certificate in Financial Planning. His passion is to help retail investors invest better, and that passion was one of his primary reasons for joining The Motley Fool Australia in late 2011. Mike has written thousands of articles since joining, including for Fairfax Media, Yahoo!7, Ninemsn and has also appeared on ABC's The Business. You can see all of Mikes' holdings here

Published February 24, 2016 11:14 am AEDT

The Lifehealthcare Group Ltd (ASX: LHC) share price has plunged more than 37% to $1.59, after the distributor of medical equipment reported a big fall in net profit despite revenues rising.

Revenues rose 12.3% to $54.4 million for the first half the 2016 financial year, compared to $48.4 million in the previous year. However, reported net profit was down significantly on last year, falling from $4.2 million to just $3.1 million.

The main culprits were a blowout in expenses, including staff costs and cost of goods sold. As a result, earnings before interest, tax, depreciation and amortisation (EBITDA) was the same as the previous year at $8.5 million. Higher depreciation expense and interest – thanks to a higher debt load – ensured profit before tax was lower.

Debt increased due to LifeHealthcare's acquisition of Medical Vision Australia (MVA) in October 2015 from $29.6 million to $35.2 million.

Lifehealthcare has also cut its dividend from 7.5 cents to 5 cents, but with virtually no cash left in the bank and negative operating cash flows, the company could be forced to use debt to pay for the dividend in this period.

So What?

Not exactly a great result the market was hoping for, but the company is still forecasting revenues of between $113 and $116 million for the full year, with EBITDA margins consistent with historical performance. The company also says 'earnings quality…. to strengthen on full year basis.'

Now what for Lifehealthcare?

The review into private health insurance and the price of prosthetics could have a negative impact on the company's revenues with 35% of the company's project forward revenues derived from products on the Prosthesis List. That news is likely to have scared the heck out of investors, but the selling appears overdone – It's not like the company is suddenly going to lose a third of its revenues, so it's not suddenly worth 37% less.

Foolish takeaway

Investors appear to be overreacting (don't they always?) to 'perceived' or actual bad news this reporting season. This could be an opportunity for investors. I, for one will continue to hold my shares and may even top up my holding once Motley Fool Trading rules allow.

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