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Is Primary Health Care a buy?

Medical centre operator, Primary Health Care Limited (ASX: PRY) has lifted its guidance for the full 2013 financial year.

In an announcement to the ASX today, Primary reported that it was upgrading it forecast for earnings before interest, tax, depreciation and amortisation (EBITDA) from a range of $370m to $380m, with the new forecast ranging between $380m to $390m.

The company also expects earnings per share to grow by between 24 to 29%, from its previous estimate of 20% to 25%.

This follows on from the outstanding results the company announced for the half year to December 2012. Over the six months, EBITDA rose 11.6%, while net profit after tax jumped 50% to $69.5 million, and earnings per share climbed 48% to 13.8 cents per share. Primary also raised its dividend by 30% to 6.5 cents a share. The full year dividend is forecast to be 13 cents, resulting in a dividend yield of around 2.6% at the current price of $5.05, although the company may yet surprise the market and lift the final dividend.

Primary has several operating segments, including Pathology, Medical Centres, Imaging and Health Technology. While Pathology is the biggest revenue earner, it has lower margins than the Medical Centre division. In the last half year, Medical Centres generated $151.6m in revenues and $84m in EBITDA. By comparison, Pathology generated $409.5m in revenues, but just $69.5m in EBITDA.

Despite the company raising its forecasts, it seems the market wanted more, with the share price down 4.8% in mid-afternoon trading. Is it the lack of commentary from Primary over its intentions for the final dividend to blame? It could be, with the search for yield outweighing almost all other considerations it seems.

Still, over the past year, Primary has seen its shares rise by more than 86%, compared to pathology competitor Sonic Healthcare’s (ASX: SHL) 15%, and the S&P/ASX 200 Index’s (Index: ^AXJO) (ASX: XJO) 21%. Trading on a forecast P/E ratio of around 17, and with a poor return on equity of less than 5%, Primary appears to have outrun a ‘fair’ valuation.

Foolish takeaway

For investors looking for the next Primary Health Care, Capitol Health Limited (ASX: CAJ) provides diagnostic imaging services through several clinics in Victoria. Capitol has yet to look interstate, and its results so far suggest it has just stepped onto its growth path. As such, the company is worthy of adding to your watchlist.

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