Healthscope Ltd (HSO) – Neutral
Healthscope (HSO) reported results which reflect a Company in a transition year. Revenue was up +3.7%, Operating EBITDA declined -4.4% whilst operating NPAT declined by -10.3%. 6.7cps full year dividend equates to 70% of Statutory NPAT (continued and discontinued) adjusted for other income and expense items.
COMPANY DATA
| Date of Report | ASX | Price | Price Target | Analyst Recommendation |
| 22/08/18 | HSO | A$2.20 | A$1.99 | NEUTRAL |
| Date of Report 22/08/18 | ASX HSO |
| Price A$2.20 | Price Target A$1.99 |
| Analyst Recommendation NEUTRAL | |
| Sector : Healthcare | 52-Week Range: A$1.61 – 2.59 |
| Industry: Hospitals | Market Cap: A$3,879.5m |
Source: Bloomberg
INVESTMENT SUMMARY
We rate HSO as a Neutral for the following reasons:
- Had an unsolicited takeover bid at $2.36 cash per share on 27 April 2018.
- Attractive industry fundamentals, with aging population.
- Second largest private hospital operator in Australia.
- Supportive government policy (tax incentive for people to get private health insurance).
- Ramp-up from brownfield projects should be supportive of earnings.
- Increase in utilization rate driving operating leverage.
- Attractive industry dynamics, high barriers to entry and relatively stable earnings commands premium to the market.
We see the following key risks to our investment thesis:
- Competitive risk (new hospitals, new beds), from listed and unlisted hospital operators.
- Cost pressures (negotiating price increases with government and private health insurance companies).
- High debt levels (potential balance sheet pressure should earnings decline).
- Change to government policy on private health insurance.
- Execution risk (able to get the uplift in earnings from brownfield projects).
- Currency risk.
Figure 1: HSO Revenue by Segment
Source: Company
Source: Company
ANALYST’S NOTE
Healthscope (HSO) reported results which reflect a Company in a transition year. Revenue was up +3.7%, Operating EBITDA declined -4.4% whilst operating NPAT declined by -10.3%. 6.7cps full year dividend equates to 70% of Statutory NPAT (continued and discontinued) adjusted for other income and expense items.
HSO’s largest segment, its Hospitals division delivered operating EBITDA of $344.7m, a -4.1% decline from FY17 but at the top end of HSO’s revised guidance.
On a positive, on the analyst call, management highlighted that in “performance significantly improved in the second half reflecting the benefits of operational efficiencies, new leadership in Victoria and Tasmania and contributions from brownfields”. The share price trades at a slight discount to April 2018’s $2.36 cash per share unsolicited proposal from a consortium of financial investors to acquire all of the shares in Healthscope by a way of a scheme of arrangement. Reiterate Neutral recommendation, however, if it begins to trade at a more significant discount, with quality assets, HSO would be worthwhile considering.
- Guidance – management targets “FY19 Hospital Operating EBITDA growth of at least 10% compared with FY18”:
1. FY19 growth capex planned to be $190 – 200m (inclusive of $105m relating to northern beaches hospital);
2. FY19 depreciation and amortisation planned to be ~$124m inclusive of Northern Beaches;
3. FY19 Net Interest Expense is expected to be ~$54 -58m.
- Hospitals (~86% of EBITDA). Revenue growth of +4.3% driven by completed and maturing brownfield expansion projects. EBITDA declined -4.1% to $344.7m and was impacted by VIC/TAS which was down $15.6m, including $7.4m EBITDA losses incurred across Geelong Private, Cotham Private and Frankston Private hospitals. Overall EBIT margins (12.0% versus 13.5% in FY17) were impacted by case mix variability and wage indexation above health fund price increases in VIC/TAS.
- NZ Pathology (~14% of EBITDA). On constant currency basis, revenue growth of +1.6% translated to EBIT increase of +2.5% and solid margins of 24.2% (albeit slightly lower than the 24.6% achieved in FY17).
- Asian Pathology sold. HSO divested its Asian Pathology operations in Singapore, Malaysia and Vietnam (completed on 17 August 2018). $279m cash proceeds equate to EBITDA multiple of 13.7x based on FY18 earnings and 15.3x based on FY17 earnings. The gains on sale of ~$165m (pre-tax) will be recognised in FY19 and net cash proceeds used to pay down debt.
- Establishing new unlisted property trust. Management completed a strategic review of freehold hospital property assets and proposes to establish new unlisted property trust to hold majority of freehold hospital property assets and lease back to HSO. HSO will own majority interest in the trust. New co-investor to hold up to 49%. HSO is currently seeking formal proposals from a preferred co-investor. Hospital properties to be transferred have a book value for land and buildings of ~$1.0bn and at those locations generate ~65% of FY18 Hospitals Operating EBITDA.
FY18 RESULTS SUMMARY…
Key profit and loss numbers are presented in the table below.
Figure 3: FY18 key P&L results 
Source: Company.
Figure 4: Peer group comparables – consensus 
Source: Bloomberg
Figure 5: Figure 5: HSO Financial Summary 
Source: BTIG, Company, Bloomberg
COMPANY DESCRIPTION
Healthscope Limited (HSO) provides healthcare services. Healthscope is a leading private healthcare provider in Australia with 45 hospitals and 48 medical clinics including skin clinics and a specialist breast clinic. The company also has international pathology (50 labs) operations across New Zealand, Malaysia, Singapore and Vietnam. The company employs over 18,000 people across its operations.
Recommendation Rating Guide
| Recommendation Rating Guide | Total Return Expectations on a 12-mth view |
| Speculative Buy | Greater than +30% |
| Buy | Greater than +10% |
| Neutral | Greater than 0% |
| Sell | Less than -10% |
Reach Markets Disclaimer
Reach Markets Pty Ltd (ABN 36 145 312 232) is a Corporate Authorised Representative of Reach Financial Group Pty Ltd (ABN 17 090 611 680) who holds Australian Financial Services Licence (AFSL) 333297. Please refer to our Financial Services Guide or you can request for a copy to be sent to you, by emailing [email protected].
Read our full disclaimer here >