The Healthscope Ltd (ASX: HSO) share price fell 15% to $1.86 after the company released its annual results this morning. What's going on?
- Revenue grew 4% to $2,318 million
- Net profit after tax (NPAT) fell 9% to $163 million
- Earnings per share fell 9% to 9.4 cents
- Dividends of 7 cents per share, down from 7.4 cents previously
- Net debt of $1,600 million
- Outlook for effectively flat EBITDA in 2018
So what?
It was a mixed year for Healthscope, with higher revenues more than offset by higher costs, as well as a $55 million impairment on the company's medical centre division, which it is selling. Underperformance at medical centres – also experienced by other operators like Primary Health Care Limited (ASX: PRY) – has been chronic and Healthscope effectively sold this business at half price, a serious discount.
There were also signs of margin pressure coming from insurers, with Healthscope noting "…costs have increased greater than health fund price increases in some areas of the business." Healthscope and other private hospitals derive the entirety of their revenue from health insurers like Medibank Private Ltd (ASX: MPL).
As we have noted in the past, health insurers have been swinging the big stick in recent times in an effort to better control their claims costs. In my view this is a positive for all parties in the industry as it should lead to better transparency and outcomes for patients, as well as greater efficiency for insurers and hospitals as treatment policies become increasingly specific. Still, it is not surprising to see some pressure on Healthscope's earnings in the short term.
Now what?
I've written previously on several occasions that I wasn't very keen on Healthscope at previous prices of around $2-$2.20. In my opinion, the company's growth prospects did not justify a price tag of more than 20x earnings, especially with organic revenue growth likely to continue plodding along at ~4% per annum. With shares back below $2, expansions progressing, and the troublesome medical centres divested, in my opinion Healthscope is worthy of closer investigation at today's prices.
