Healthscope Ltd (ASX: HSO) is the second-biggest private hospital operator in Australia with a market capitalisation of $3.9 billion.
I recently chose Healthscope as my top pick for December 2016. It's trading close to its 52-week low and I think now is a good time to buy.
Management recently updated the market to say it's experiencing similar numbers of patients in the first quarter of FY17 as FY16. In the medium term I think it's almost certain patient levels will increase.
Here are three reasons why you should add Healthscope to your portfolio and take advantage of its discounted price:
Defensive outperformance by the healthcare sector
The S&P/ASX 200 Health Care (Index: ^AXHJ) (ASX: XHJ) has been one of the best performing indexes over the last five years, growing 141% in that time. The S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has only risen 27% in that time.
Healthscope is an important part of Australia's healthcare system. The public healthcare system is going to find it increasingly difficult to maintain the level of care it does for the current cost, which will put more of the burden (and revenue) on the private sector.
Most elective surgeries are done at private hospitals belonging to operators like Healthscope and Ramsay Health Care Limited (ASX: RHC).
The increasing reliance on the private sector should see more patients go through Healthscope's doors. In fact there has been a 42% decrease in the number of public hospital beds per 1,000 people aged over 65 since 1994.
Illnesses and injuries don't wait for a boom or bust in the economy, they will continue to happen regardless of whether Australia's GDP is going up or down. People are willing to spend almost whatever it takes to be alive and healthy.
This provides good defensive qualities to Healthscope and other healthcare businesses.
Inevitable aging population and rising hospital capacity
Australia is one of many countries in the world where the average age is steadily increasing, the main reason for this is the large cohort of baby boomers that are now entering retirement.
The number of people over 65 and over 85 is expected to double over the next 20 years. This is going to increase the amount of people that may visit Healthscope's hospitals by a significant amount.
Healthscope is increasing the number of its hospitals to plan for these increased numbers. The plan is for 762 more hospital beds becoming operational by FY19. This will add a sizeable amount of revenue to Healthscope.
Potential geographical growth
Healthscope is much more Australian focused than Ramsay. However, there is potential for Healthscope to expand overseas just like its larger rival has.
Healthscope's international operations are in New Zealand, Malaysia, Singapore and Vietnam, which is a fairly small percentage of its overall earnings, but by having a foothold in these locations it can build trust and credibility, which may allow it to expand further in due course.
Time to buy?
I think it is, which is why I recently bought some Healthscope shares. It's currently trading at only 19.3x FY17's estimated earnings, compared to Ramsay which is trading at 26x FY17's estimated earnings.
Healthscope has a decent dividend yield of 3.32% which is unfranked but I expect it to be franked reasonably soon. By comparison, Ramsay has a grossed up dividend yield of 2.46%.
