The S&P/ASX 200 Health Care (Index: ^AXHJ) (ASX: XHJ) has performed extremely well and is up over 24% during the last year. However Primary Health Care Limited (ASX: PRY) has bucked the trend and is actually down over 6%. Does this present an opportunity?
The long-term trend of strong population growth coupled with rapid aging is supportive of the company, which provides medical services to patients through its pathology, imaging, medical centre and technology businesses. Here are three reasons why Primary can put your portfolio in good health.
Growth in pathology business
The pathology business is the second-largest player in the Australian market and generated nearly 60% of FY14 revenues. Over the past two years revenue growth has been ahead of market leader Sonic HealthCare Limited (ASX: SHL) in this segment, which suggests it is gaining market share.
Further growth is likely as state governments look to outsource this service to the private sector due to budgetary constraints. With the largest network of collection centres (approximately 1,800) and a reputation as an efficient operator, the company is well placed to tender for the one third of national pathology volume that it estimates to be uncontested.
GP co-payment could be a positive disruption
Whilst it has been suggested that co-payment will spell the death of bulk billing, I believe it presents a great opportunity for the company.
Some in the medical profession have suggested that patients will switch to the emergency department of general hospitals. However the wait time involved and fall in quality of care outweigh the $5 saving from not visiting a GP. Not only are bulk bill GPs not set to lose market share, they could very well gain market share as the Doctors Reform Society predicts that GP fees could hit $100 within two years – equating to a whopping $67.95 out-of-pocket expense for those opting for private billing.
A more detailed discussion of the above and other reasons why the co-payment could be beneficial for Primary can be found here.
Compelling financials
The company has a strong balance sheet with a debt to equity ratio of 40%, which will enhance its ability to execute the eight new medical sites identified for roll out in mid FY16 and beyond. Also it has flagged EPS growth of 5 – 12% for FY15 – an estimate it deems to be conservative given the uncertainties surrounding the industry.
The company is currently trading at a P/E just above 14.5x – cheap by most standards and even cheaper given the future prospects. To top it off the stock provides a generous dividend yield of 4.3%, which will go a long way to boost income in this low interest rate environment.
