Australia's healthcare sector could be in for a shake-up with reports from the Fairfax press suggesting Healthscope Ltd (ASX: HSO) is in discussions to sell its pathology business.Is Healthscope Ltd about to sell its $150 million pathology division?Healthscope, which made its long-awaited return to the ASX nearly 12 months ago, is Australia's second largest private hospital operator and a leading pathology and medical centres provider, with roughly 600 collection centres locally as at 30 June 2014.
Indeed, the local pathology division accounted for just over 7% of total group earnings before interest, tax, depreciation and amortisation (EBITDA) in the 2014 financial year – or $26.1 million – while its international pathology division brought in $52.8 million, representing just over 14% of group EBITDA. The pair had grown 30.7% and 18.5% year-over-year, respectively.
In the latest half however, revenue and earnings from the Australian unit took a hit due to a cut in Medicare fees. A decision was also made to close its loss-making Queensland pathology business, with the closure having been implemented in February 2015. This was largely due to its weak position against Sonic Healthcare Limited (ASX: SHL) and Primary Health Care Limited (ASX: PRY) within that market.
While Fairfax reported that Healthscope is believed to have been approached by various local and offshore buyout firms, it also stated the possibility of an auction for the asset which, according to some valuations, could be worth up to $150 million.
Should you buy?
Healthscope is not only in the box-seat to benefit from Australia's trend towards greater private health cover, but also from the nation's booming population growth. As the population grows and ages, Healthscope's services will no doubt be in high demand.
However, the shares last traded for $2.73, putting them on a rather hefty price/earnings ratio of 28x forecast 2015 earnings. That suggests the market has already priced in significant increases in the company's future earnings, so Healthscope may be one to simply add to your watchlist for now, with the possibility of a purchase in the event of a pullback in price in the near future.
