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Why the Pulse Health Limited share price plunged 30% today

Drip on the background a hospital corridor concept

Pulse Health Limited (ASX: PHG) saw its share price plunge more than 30% to around 30 cents, after the private hospital operator revised its 2016 earnings guidance down.

The company now says that it expects underlying earnings before interest, tax, depreciation and amortisation (EBITDA) to be between $8 and $9.2 million – down from the $10.2 million expected in February 2016.

Pulse says the major contributor is due to a recent downturn in activity in its three rehabilitation hospitals. The company says the lower end of guidance is there in case strategies to improve earnings are unsuccessful.

However, Pulse says it remains confident in the demand outlook for rehabilitation care and its ability to improve utilisation in each of our hospitals over the short to medium term. The company plans to increase utilisation by providing non-rehab services where appropriate.

The revised results don’t include any contributions from recently announced acquisitions which are expected to deliver an incremental increase in FY17 EBITDA of $6.4 million. Pulse acquired 6 Australian facilities and one New Zealand hospital in December 2015 for $48.3 million upfront plus potential earn outs depending on performance in FY16 and FY17.

At the time, Pulse said it expected to report FY17 EBITDA of $18.1 million, but that appears to be in jeopardy as well now.

Given the specialist nature of Pulse’s hospitals, it’s unlikely that larger and more diversified general hospital operators Ramsay Health Care Limited (ASX: RHC) and Healthscope Ltd (ASX: HSO) will be similarly affected.

Foolish takeaway

A relatively illiquid share, Pulse Health could be one to watch, particularly if it can reach its previous FY17 EBITDA target, and given the tailwinds in the sector.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

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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