Private hospital operator Pulse Health Limited (ASX: PHG) could be a bargain buy after the share price halved since May 18. That includes another 12.5% fall to 21 cents today.
The company's share price plunged 30% in one day to 30 cents a share in May, after Pulse announced that underlying earnings before interest, tax, depreciation and amortisation (EBITDA) would be between $8 million and $9.2 million for the 2016 financial year (FY16) (excluding recent acquisitions).
Pulse blamed the fall on a recent slowdown in activity at its three rehabilitation hospitals.
Looks cheap
Howewer, on the plus side, with a market cap of just $53 million and net cash of $2.7 million, even at the lower end of guidance, Pulse Health is trading on an EV/EBITDA ratio of just over 6x.
By comparison, Ramsay Health Care Limited (ASX: RHC) and Healthscope Ltd (ASX: HSO) trade on multiples of 15x – which suggests that Pulse is cheap.
Acquisitions to add value
In December 2015, Pulse announced the acquisition of a specialist surgical hospital in New Zealand, and five day surgeries and one acute hospital in Australia in early December for an upfront payment of $48 million and further earn outs. At the time, Pulse was also guiding to FY17 EBITDA of $18.1 million, including a $6.4 million contribution from the acquisitions.
However, Pulse has announced this week that it is not proceeding with the Waikiki Private Hospital and Westminster Day Surgery acquisitions. Those assets were expected to contribute $1.6 million of the incremental $6.4 million of FY17 EBITDA.
In simple terms that means the acquisitions announced in December 2015 should contribute $4.8 million in additional EBITDA in FY17, bringing FY17 EBITDA guidance down to $16.5 million. Those acquisitions will also deliver revenues and earnings this financial year – although it won't be a full 12 months.
Takeover target?
Given the acquisition of Vision Eye Institute and its day surgeries last year by Chinese company Jangho, its attractive and diverse assets, Pulse could be a takeover target as well – particularly at current prices.
Foolish takeaway
While the recent earnings downgrade looks bad, the 50% fall in the share price appears unjustified, and Pulse could be a bargain at these prices. Even if earnings are hit in the short term, Pulse does have some strong tailwinds behind it in an ageing population.
