After a poorer-than-expected half-year that saw shares crushed earlier this year, Lifehealthcare Group Ltd (ASX: LHC) has reported its full year results to the market this morning. Although a strong headline result, the underlying performance of Lifehealthcare was mixed.
Here's what you need to know:
- Revenues rose 16% to $115 million
- Net Profit After Tax ("NPAT") rose 102% to $7.5 million
- Underlying NPATA* rose 1.4% to $8.8 million
- Diluted Earnings Per Share of 17 cents per share
- Dividends per share of 12.5 cents per share
- Margins declined 0.6% due to changing product mix and weaker Australian Dollar
- Outlook for mid-single digit revenue growth, with low to mid-single digit EBITDA growth due to weaker AUD impact
*NPAT excluding impact of intangibles, one-offs, and in this case a $4.5 million tax penalty incurred in the previous year
So What?
Well, the headwinds that afflicted the company have stuck around for the full year. Lower margins due to a weaker Australian Dollar (since Lifehealthcare sources its product from overseas) were well flagged but in this case partially insulated by the group's hedging strategy. Management has guided for more margin deterioration in 2017 as the group's inventory is replaced and hedging strategies roll over.
As a result of a $4.5 million tax payment incurred in 2015 (which dragged that year's results down), profits this year appear to have doubled due to not having to make that payment again. For this reason, using the underlying NPATA figure, which was up just 1.4%, is more appropriate.
On the operational front it was good to see that the group's cash performance got back on track with the company generating an operating cash surplus after the deficit in the first half. A stronger second half following new product releases saw working capital (as a percentage of revenue) return to more normal levels of 31%, down from 35%.
Prosthetics pricing effects
So far, concerns over changes to prosthetics pricing have proven to be a storm in a teacup. Lifehealthcare also reports it has no exposure to areas that are initially coming under focus for review by the Industry Working Group. However, 38% of revenues are drawn from 'Prosthesis List' (implants which get reimbursed by insurers) and this remains a risk area even if the likelihood of impact appears to have decreased.
Big tailwinds from an ageing population?
Like Healthscope Ltd (ASX: HSO), Lifehealthcare uses Australian Bureau of Statistics (ABS) projections of an ageing population to suggest a long-term tailwind for product demand. The portion of the population over 85 is expected to increase from 15% currently to 19% by 2030, with a corresponding impact on demand for healthcare services. As a junior healthcare company however, investors should remember Lifehealthcare's future is far more dependent on its operating performance now rather than long-term tailwinds.
Now What?
Although the results for the year weren't stellar, they weren't too bad and considering the group's relatively low price tag, I expect shares could rise today. A drawback for me was that strong revenue growth was held back by an increase in depreciation and amortisation, the former of which was due to 'increased instrument kit investments across FY15 and FY16, supporting revenue growth' which suggests that at least in part, higher depreciation expenses might be repeated in future years.
An increase in new surgeon numbers was a big positive and should help drive sales forward next year. The outlook for 2017 is for limited growth but at today's price of 9 times underlying profit I think many of the risks are priced in to Lifehealthcare.
