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Is the Healthscope Ltd share price a bargain?

On Monday, the Healthscope Ltd (ASX: HSO) share price plumbed all-time lows as Australia’s second-largest private hospital operator behind Ramsay Health Care Limited (ASX: RHC) notched its 10th straight day of falls.

Whilst part of the fall may be attributed to leading investment bank Credit Suisse downgrading the hospital operator to ‘underperform’ (and placing a $2.05 12-month price target on the stock), the fact that Healthscope’s share price is down over 13% since the start of the year warrants some closer attention in my opinion.

This is what I found.

Share price history

Healthscope’s shareholders have had a rollercoaster ride over the last two years.

The company listed on the ASX in August 2014 at $2.10 a share and enjoyed a stellar first two years as a listed company.

Since listing to September 2016, Healthscope’s shares surged a whopping 40% to trade at $3.09 per share as growing profits and favourable tailwinds lifted its share price higher. However, in mid-October 2016, Healthscope’s shares came crashing down after management revealed a shock profit downgrade due to slowing volume growth in its flagship hospitals division.

Healthscope’s shares have traded sideways for the better part of six months since the downgrade, despite the company reporting better-than-expected half-year results. In my opinion, this makes the recent pullback in share price an opportune time to revisit the investment thesis for this company.

Company fundamentals

I’ll be the first to admit that apart from last week’s broker downgrade, I struggle to find a valid reason for Healthscope’s recent pullback in share price.

For the half-year ended 31 December 2016, Healthscope reported statutory net profit after tax was down 7% to $90.5 million, despite group revenue and operating earnings (EBITDA) being up 3.9% and 5.1% respectively.

Whilst the drop to headline NPAT was disappointing, most of this downside was expected given management’s prior downgrade announcement in October.

Nevertheless, the key reason for Healthscope’s profit downgrade (weak volume growth in its hospitals division) still managed to surprise on the upside, with the hospitals division delivering EBITDA growth of 2.2% despite mixed volumes.

Growth potential

Although Healthscope’s half-year results were down on prior year figures, Healthscope remains well positioned to grow earnings organically.

With construction of its Northern Beaches Hospital in New South Wales remaining ahead of schedule, and the company reporting above-average volume growth at its newly opened facilities in each of Gold Coast Private, Knox Private and National Capital Private hospitals, I believe Healthscope should be able to leverage Australia’s ageing population well into the future.

Foolish takeaway

Based on Monday’s closing price of $2.00, Healthscope’s shares trade on a trailing price-earnings of just under 20x and an unfranked, growing, yield of 3.7%.

In my view, I believe this presents an excellent risk-reward opportunity for long-term investors looking to gain exposure to a defensive industry.

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Motley Fool contributor Rachit Dudhwala has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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