CRASH: Lifehealthcare share price plunges 37%

The Lifehealthcare Group Ltd (ASX: LHC) share price has plunged more than 37% to $1.59, after the distributor of medical equipment reported a big fall in net profit despite revenues rising.

Revenues rose 12.3% to $54.4 million for the first half the 2016 financial year, compared to $48.4 million in the previous year. However, reported net profit was down significantly on last year, falling from $4.2 million to just $3.1 million.

The main culprits were a blowout in expenses, including staff costs and cost of goods sold. As a result, earnings before interest, tax, depreciation and amortisation (EBITDA) was the same as the previous year at $8.5 million. Higher depreciation expense and interest – thanks to a higher debt load – ensured profit before tax was lower.

Debt increased due to LifeHealthcare’s acquisition of Medical Vision Australia (MVA) in October 2015 from $29.6 million to $35.2 million.

Lifehealthcare has also cut its dividend from 7.5 cents to 5 cents, but with virtually no cash left in the bank and negative operating cash flows, the company could be forced to use debt to pay for the dividend in this period.

So What?

Not exactly a great result the market was hoping for, but the company is still forecasting revenues of between $113 and $116 million for the full year, with EBITDA margins consistent with historical performance. The company also says ‘earnings quality…. to strengthen on full year basis.’

Now what for Lifehealthcare?

The review into private health insurance and the price of prosthetics could have a negative impact on the company’s revenues with 35% of the company’s project forward revenues derived from products on the Prosthesis List. That news is likely to have scared the heck out of investors, but the selling appears overdone – It’s not like the company is suddenly going to lose a third of its revenues, so it’s not suddenly worth 37% less.

Foolish takeaway

Investors appear to be overreacting (don’t they always?) to ‘perceived’ or actual bad news this reporting season. This could be an opportunity for investors. I, for one will continue to hold my shares and may even top up my holding once Motley Fool Trading rules allow.

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Motley Fool writer/analyst Mike King owns shares in LifeHealthcare. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. 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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