Debt-laden hospital and pathology operator Primary Health Care Limited (ASX: PRY) reported its full-year results to the market today. Although profits crashed due to one-off expenses and impairments, underlying profits also declined 7% with the company still facing headwinds.
Here's what you need to know:
- Revenue rose 3.6% to $1,636 million
- Statutory profit fell 41% to $74.9 million
- Underlying* profit fell 7% to $104 million
- Earnings per share declined to 7.4 cents per share
- Full year dividends of 12 cents per share (2.8% yield)
- Gearing* down to 25% due to 'capital recycling' initiatives
- Ongoing focus on cost reduction and efficiency, investing for growth in parallel services
- Outlook is "expects to see improvement in reported and underlying performance in FY 2017" (FY = Financial Year)
*Excluding an Australian Taxation Office (ATO) settlement and impairments
So What?
Although well heralded, it wasn't a good year for Primary. Higher spending on recruitment, centre openings, and higher wages resulted in earnings pressure at the Medical Centres segment since revenues stayed flat.
Pathology reported a decent performance with revenues and earnings rising, although the imaging segment saw a 1.2% decline in revenue and a whopping 14% decline in Earnings Before Interest, Tax, Depreciation, and Amortisation.
Surprisingly this appears to be due largely to the public perception of cuts to diagnostic imaging co-payments, rather than the impacts of actual cuts. Sonic Healthcare Limited (ASX: SHL) noted much the same thing in its full-year results today.
The transformation project
Primary has dedicated several pages to 'strategic initiatives' which all shareholders and would-be buyers should read. The guts of it is that the company is using a variety of strategies to improve its cash flows, lift return on investment, reduce costs / capital requirements, lift efficiency/productivity as well as keep practitioners and customers happy.
Reading between the lines on the company's recent recruitment troubles and comments about better aligning practitioner goals with company goals, Primary could have lost its way a bit. With a renewed focus on clients and practitioners, including practitioner training, there could be significant room for business improvement simply through lifting the quality of service as well as staff/practitioner engagement.
Cash flows from the business remained fairly ordinary. If we exclude gains on sale, Primary's operating cash flow of $285 million minus acquisitions and dividends puts the company just above the break-even point – and the business paid $50 million less in tax this year.
While this is expected to improve, it looks as though the group's dividends will remain subdued, and more debt could be required if the group wants to begin growing again. Primary's total debt situation has improved but it could reverse again relatively quickly.
So What?
At today's prices, Primary is trading on approximately 21x its underlying earnings. Depending on the amount of financial improvement achieved in the coming year, today's prices might be around 18-19x 2017's earnings – roughly in line with the ASX.
No bargain, and a challenging investment case given its price, operational performance, and the potential for growth. Investors could be banking on a takeover, but relying on one of those is not the key to having a market-beating portfolio. Even though the businesses are not directly comparable, given the choice between Primary Health and Sonic Healthcare (which also reported today), I'd pick Sonic every time.
