The Healthscope Ltd (ASX: HSO) share price is up 6% to $2.37 today after the company released its results for the 6 months to 31 December 2016. Despite lower statutory profits, the group overall delivered modest improvements in several areas – here's what you need to know:
- Revenues rose 3.9% to $1,192 million
- Net profit after tax (NPAT) fell 7% to $91 million
- Operating NPAT (a measure of ongoing profitability) fell 4% to $96 million
- Operating Earnings Before Interest, Tax, Depreciation, and Amortisation (EBITDA) grew 5.1% to $217 million
- Dividends maintained at 3.5 cents per share
- Outlook for 'rate of growth in Operating EBITDA in the second half to be similar to the first half'
So What?
As previously announced, Healthscope has seen some issues with lower volumes and the company has implemented methods to lower its costs. Business appears to have picked up however, and 5.1% growth in Operating EBITDA is better than expected after the first quarter's performance. My concern is that this method of reporting does not accurately reflect the company's real profitability:
As we can see, Operating EBITDA grew predominantly as a result of higher depreciation (due to Healthscope's building projects). I would suggest shareholders focus on the company's operating NPAT and revenue figures instead, which show a more modest picture.
All in all, Healthscope's businesses performed respectably, with modest growth in the main hospitals business, strong growth in the smaller NZ pathology segment, and an immaterial decline in the Singaporean and Malaysian businesses. There was a slight overall increase in employee costs as a percentage of revenue, while other costs remained well contained. It is important to keep an eye on these metrics as a business like Healthscope has modest profit margins and must keep costs under control.
Now What?
Growth in patient numbers appears likely to remain subdued for the time being, and management has launched a site-by-site review to improve business responsiveness to times of lower volume. Healthscope expects to serve large additional numbers of patients once its new hospitals are completed however, and could see a sizeable increase in total revenues over the next few years.
Shares appear more modestly priced than in recent times, although with a $4 billion market capitalisation Healthscope does not appear a standout bargain to me. Investors should do further research into the private hospital industry's dynamics (including growth in demand and relationship with insurers), as well as into Healthscope's ongoing development projects before considering a purchase.
