Should you buy Healthscope Ltd shares?

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The S&P/ASX 200 Health Care Index (ASX: XHJ) experienced a stellar past 12 months to increase over 15% during this time (driven by global demand for “defensive growth stocks”). Fortunately for investors, the S&P/ASX 200 Health Care Index’s gains were predominantly attributable to a 25% and 50% rally in its two largest members  — CSL Limited (ASX: CSL) and Cochlear Limited (ASX: COH), respectively.  Accordingly, investors seeking exposure to the healthcare sector can still find value in lesser known stocks.

I believe Healthscope Ltd (ASX: HSO) might be one such stock to provide exposure to the sector.

About Healthscope

Healthscope listed on the ASX in 2014 at $2.10 a share. The company is Australia’s second-largest private hospital operator behind Ramsay Healthcare Limited (ASX: RHC). The duo account for just over 40% of Australia’s private hospital revenue according to figures from IBISworld.

This makes Healthscope influential in a $62.1 billion industry growing at average annualised 4.3% (based on IBISworld estimates).

Company operations

Healthscope leverages its position in the health industry to deliver solid returns for shareholders.

In the half-year ended 31 December 2015, Healthscope reported net profit after tax up 64% to $95.9 million. Group revenue fell 7% to $1.15 billion, however after stripping out discontinued pathology operations, continuing business revenue was 6% higher on the prior corresponding period.

Healthscope’s long-term borrowings ticked up 8% to $1.2 billion, due to additional financing required to fund the development of the Gold Coast Private Hospital and Northern Beaches Hospitals. However, these projects position Healthscope for future growth, and given group debt sits at about 47% of contributed equity (which is well below industry leader Ramsay Healthcare), investors should not be too concerned by the increase.

Industry risks

A key risk for Healthscope shares is government changes to healthcare policy.

As witnessed through the share prices of Primary Health Care Limited (ASX: PRY) and Capitol Health Ltd (ASX: CAJ), adverse policy changes to the operating environment can spell disaster for shareholder value.

Although Healthscope recently divested its Australian pathology arm (hence it should not face short-term risk), it remains captive to government regulatory changes and so investors must remain cognisant of these risks when investing.

Foolish takeaway

Noting Healthscope’s operations can be affected by government policies, the private health care industry remains lucrative as a growing population places demand on public resources. Accordingly, the need for private hospitals should continue long into the future leaving Healthscope well positioned for investors seeking exposure to the healthcare sector.

With Healthscope’s shares trading on a price-earnings of just under 27, investors may find value in the company at current prices.

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Motley Fool contributor Rachit Dudhwala has no position in any stocks mentioned. 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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