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Primary Health Care’s 29% increase in profit fails to cheer investors

Shareholders in listed medical practice and pathology company Primary Health Care (ASX: PRY) have failed to get excited by what would appear to have been a solid full year financial result.

  • Revenues climbed 4.6% to $1.456 billion
  • Net profit after tax surged 28.7% to $150 million
  • EPS was up 28% to 29.9 cents per share
  • Dividends per share for the full year were 17.5 cents compared with 11 cents in the prior year. The final dividend was increased by 83% to 11 cents from 6 cents.

Management highlighted significant margin gains in the Medical Centres division of 0.8%, in the Pathology division of 0.8% and in the Imaging division of 4%. These margin gains helped to contribute to the bottom line however the substantial fall in finance costs which dropped from $97 million in financial year (FY) 2012 to $76.5 million in FY2013 which was also a significant contributor. Net debt finished the year at $1.041 billion.

Outlook and valuation

Compared with its health sector peers, Primary looks reasonably valued. Sonic Healthcare (ASX: SHL) is trading on a forward PE multiple of 15.8 while Ramsay Health Care (ASX: RHC) which has a stronger growth profile is trading on a forward PE of 22.2 times (forecasts from Morningstar). 

Chart

Source: Google Finance

However given the muted response by investors to the results — the share price was off 0.5% by midday — one can assume that the outlook provided by management of earnings per share growth in FY2014 of between 7% and 13% had investors questioning the median 15.8 forward price-to-earnings multiple.

As the chart above shows, Primary’s share price has run hard over the past 12 months and outperformed the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) by around 50%. With such a wide range provided for FY 2014 earnings guidance it is perhaps understandable that its share price might take a breather.

Foolish takeaway

Healthcare is one of the few sectors where investors can be very sure of future demand for services. Less certain is the profitability of the healthcare industry given its high reliance on government contributions and policy. As has been seen recently by the Labor government’s policy announcement with regards to the fringe benefits tax, investors need to be alert to changes in regulations.

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Motley Fool contributor Tim McArthur owns a share in Primary Health Care.

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