Private hospital and international pathology operator Healthscope Ltd (ASX: HSO) reported its full-year results to the market today. Influenced by a divestment during the year, the company's results 'from continuing operations' arguably reflect a more accurate picture of the business going forwards, and these are the metrics I will focus on:
- Revenue from continuing operations rose 6.2% to $2,291 million
- Net Profit After Tax (NPAT) rose 19% to $183 million
- Earnings Per Share rose 12% to 10.5 cents per share
- Dividends Per Share rose 6% to 7.4 cents per share
- Growth was mostly organic with margin improvements led by cost efficiency
- Gearing* of 35%
- Outlook for continued new facility construction, plus ongoing focus on operational effiency in 2017
- Management looking for joint ventures or management contracts in Asia
*Net debt divided by net debt + shareholder's equity
So What?
A good report from Healthscope, and it was pleasing to see organic growth of the business as well as the divestment of the Australian Pathology operations, which wasn't core to Healthscope's ongoing businesses. It's important to note that although Net Profit After Tax rose significantly, a fair chunk of this was due to a $26 million reduction in interest expenses (before tax) as a result of a new capital structure.
Over the near term management is looking to increase capacity at some of its sites as well as use its successful track record to tender for additional contracts, both in the ANZ region and in South East Asia.
Hospitals remain by far the biggest contributor to earnings, albeit with the lowest margins, and Healthscope will see significant increases to its capacity here in the next couple of years as projects come to completion.
Industry-wide evolution
As I noted in my earlier coverage of Medibank Private Ltd (ASX: MPL) and Sonic Healthcare Limited (ASX: SHL) the medical industry is evolving to face a number of challenges including regulatory reform. A particular issue that caught my eye is Medibank's intention to evolve from 'health insurer' to 'health assurer', which appears to focus on tying health insurance payments to patient outcomes.
Healthscope has its own initiatives in place here with the company looking to strengthen links between its hospitals, medical centres, and private health insurers. Healthscope will also 'continue to work collaboratively with private health insurers to explore additional pay for quality initiatives' (emphasis mine).
With health insurers holding much of the buying power I expect the collaboration could be rather one-sided, with hospitals and clinic operators having to lift accountability and reporting standards. However, the plus side of this is that the quality of their service offering will likely rise, which may alleviate some pressure when it comes to regulatory reform, because it will be harder to argue funds are being spent inefficiently.
Long-term growth drivers
Healthscope has significant growth tailwinds. The Australian population is obviously ageing, with the number of people above the age of 65 expected to increase by 37% over the next decade. Lifestyle and degenerative disease treatment demand is increasing, partly due to longer lifespans (life expectancy of 94 years expected by 2025), and there's been a 42% decline in public hospital beds per 1,000 people aged 65+ since 1994. You can find references for these figures on page 14 of Healthscope's presentation today.
They're impressive metrics and I expect there will be an increasing effort to shift healthcare demand from the public to the private sector in the future – current stagnant levels of private health insurance notwithstanding. However, these tailwinds won't materialise overnight and the past year's worth of organic growth and cost cutting shows that Healthscope's results won't shoot the lights out without further expansion and heavy investment. The company is priced at 29 times earnings and this is too high for such limited organic growth. Despite its perception as a defensive growth business, I would not consider Healthscope Ltd a buy today.
