A quick look at the 12-month price chart for Primary Health Care Limited (ASX: PRY) will leave most shareholders feeling pretty disappointed. After reaching $5.50 a share in late March of this year, the shares are now trading closer to $3.50 – a 36% decline and now at levels not seen since 2012.
Perhaps more disappointing for shareholders is Primary Health Care's relative performance against other companies in the sector. As the chart below demonstrates, Primary Health Care has significantly underperformed against other healthcare companies such as Ramsay Health Care Limited (ASX: RHC) and Sonic Healthcare Limited (ASX: SHL).
Source: Google Finance
Interestingly, it appears there are a large group of investors and traders who are confident of further falls in the share price. According to ASIC, more than 12.5% of the issued stock is currently held in short positions. That puts Primary Health Care in the same league as Worleyparsons Limited (ASX: WOR) and Cabcharge Australia Limited (ASX: CAB) – two companies facing serious structural and industry headwinds.
Investors must now ask the question – Is Primary Health Care at bargain prices or could there be further falls to come?
To give investors a better understanding of the company, here are some important points that could provide a clearer picture of where it is heading.
Background
Primary Health Care is a diversified healthcare company with a market capitalisation of $1.8 billon.
It has a number of distinct business units including pathology, imaging, medical centres and medical software.
Performance
In FY15, Primary Health Care reported revenues of $1.618 billion, an increase of 6.2%. Excluding the proceeds from an ATO settlement, underlying net profit after tax (NPAT) grew by only 3.9% to $119.1 million.
Margins have been under pressure recently as a result of Medicare reimbursement cuts, subdued patient volumes, increased investment in medical centre operations and the loss of a imaging operation in Buderim. The result of these factors has seen EBIT margins decline from 16.8% t0 15.3%.
Balance Sheet
Primary Health Care carries more than $1.2 billion worth of interest bearing liabilities on its balance sheet and less than $50 million in cash. This gives the company a net debt to equity ratio of nearly 48%.
It is interesting to note that more than 71% of the company's assets as stated on the balance sheet comes from goodwill with a carrying value of more than $2.8 billion.
Strategic Review
The company has recently completed a strategic review where it was able to identify a number of areas for improvement it believes could increase NPAT by 2-3% annually.
Some of these initiatives include:
- Expanding large scale medical centres where a number of different healthcare professionals co-exist to meet all of the customers' needs in one place.
- Improving recruitment and retention of key employees as well as improved training for practitioners
- Increasing the scale of its imaging operations to gain the benefits of lower costs.
- Expanding its pathology operations to much larger overseas markets.
- Establishing a property trust to fund new centres and clinics
A number of these strategies will take a number of years to implement, but if successfully implemented, could position Primary Health Care for a much improved performance in the future.
Shareholder Returns
The long-term returns from Primary Health Care have been disappointing to date. Over the last 10 years, the company has delivered a total shareholder return, each year on average, of negative (-) 4.2%. This is well below the total return delivered from the broader market as well as the healthcare sector.
Valuation
Following the significant fall in the share price, Primary Health Care is now trading on a price-to-earnings ratio of 15.4.
It is also offering a partially franked dividend yield of 5.6% based on the company's most recent full year dividend of 20 cents. Investors should note however, some analysts are forecasting this dividend to fall to 17.7 cents for FY16.
Foolish takeaway
The outlook for the broader healthcare sector remains positive considering the long-term tailwinds the industry is expected to benefit from over the next decade or so.
The short-term outlook for Primary Health Care is less clear, however, as a result of the ongoing Medicare Benefits Schedule review, high debt load and the recent pressure on its margins.
The company relies heavily on funding from the Federal government for many of the services it offers and until the review is completed, the uncertainty seems to be compounding the negative sentiment surrounding the stock.
Investors considering buying into Primary Health Care may hold off until the Medicare review is completed or at the very least until an update is provided at the AGM which will be held on November 26.
