Healthscope Limited.
Results for FY 2015
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For the year ended 30 June 2015, the company reported results which delivered on the Prospectus forecasts and show that it continues to invest in its strong pipeline of growth opportunities. Revenues of $ 2.438 million showed a decline of 0.4% on the statutory prospectus but a growth of 4.8% over the previous year. Operating EBITDA of $ 388.3 million was up 0.3% on the statutory prospectus and 8.7% over the previous year. Operating EBIT of $ 286.9 million was up 0.8% on the prospectus and 9.4% over the previous year. Operating profit before tax of $ 216.3 million was up 3.19% over the prospectus and operating profit after tax of $ 153.1 million was up 4%. The cash conversion ratio remained strong at 97.3% and the final unfranked dividend of 3 cents per share takes the total for the year to 7 cents per share.
Healthscope Income Statement (Source - Company Reports)
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Managing director and CEO Robert Cooke said that the overall result was good with strong performances from the Hospitals and Pathology businesses. The Hospitals business contributed over 80% of the EBITDA and revenue and EBITDA growth were 5.7% and 10.4% respectively. The largely organic revenue growth in combination with the progress related to case mix, procurement and labour enabled an expansion in the EBITDA margin by 80 basis points. He also reported that the company continues to remain at the forefront of the industry in encouraging the transparent reporting of quality outcomes and has been working in collaboration with health funds on objective pay for quality initiatives which produce excellence in service delivery. The International Pathology business continued with its excellent track record with strong performances from New Zealand, Malaysia and Singapore. On the other hand, industry conditions in the Australian market continued to be challenging resulting in the closure of the Queensland operations in February and the sale of the remaining Australian operations in July 2015. This is the first year of operations as a listed company and the fundamentals remain strong while the pipeline of hospital expansion including the landmark Northern Beaches Hospital which was awarded this year by the New South Wales government will enable the group to deliver significant growth.
Healthscope Capital Expenditure (Source - Company Reports)
Divisional results from continuing operations
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The Hospitals division generated revenues of $ 1.852 billion which is an increase of 5.7% over the previous year. The growth was driven by increased admissions, agreed rate increases with health funds and case mix improvements. The growth in admissions was mostly organic with 23 new beds opened over the last two years. However, volume growth was affected at some key hospitals as a result of capacity constraints and, where possible, these capacity constraints will be addressed in the new capacity expansion programme. The increase in EBITDA of 10.4% to $ 327.6 million was because of the revenue growth in combination with initiatives on labour and procurement. This was the year of major construction activity with 10 projects under construction including major projects at some of the largest hospitals. Construction of the Gold Coast Private Hospital is close to completion and construction is progressing well at Holmesglen Private Hospital and the new Northern Beaches Hospital. The projects are set to deliver new beds from late in the second half of 2016.
Healthscope Hospitals (Source - Company Reports)
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The International Pathology Division generated revenues of $ 243.2 million up 8.5% over the previous year and an EBITDA of $ 60 million up 13.7% over the previous year with all the countries turning in a strong performance. The business in New Zealand showed revenue growth of 5.5% and EBITDA growth of 9.5%. This result comes from organic growth, the full-year impact of the acquisition of DML completed in October 2013 and the community services provided to the greater Wellington region from May 2015 along with improved efficiency in the laboratories and in procurement. The business in Singapore reported revenue growth of 7.9% and EBITDA growth of 5.9% reflecting the growth of the specialist and commercial contract segments and labour efficiency which was partly offset by the increased rent on further investments in laboratories. The Malaysian pathology business reported revenue growth of 0.4% and EBITDA growth of 17.6% which reflects growth across the market though it was impacted by a reduction in health screening programs and the implementation of a GST policy. Profit growth came through efficiency improvements and also the unfavourable impact in the previous year of bad debt provisioning.
Healthscope International Pathology (Source - Company Reports)
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The business of Medical Centres produced revenues of $ 60.9 million up 0.8% on the previous year and EBITDA of $ 15 million up 0.3% over the previous year. Both numbers were impacted by a shift away from upfront capital payments for new and re-contracted doctors to a structure in which doctors retain a higher proportion of the fees. This change in the fee structure also offset the benefits of increases in fees and growth in vaccine sales. However, the lower amortisation charges and the reduction in upfront capital payments resulted in an increase of 16.9% in EBIT.
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Balance sheet and outlook
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The operating cash flow increased from $ 365.6 million in the previous year to $ 377.6 million a growth of 3.3%. The company continues to maintain its record of strong cash flow generation with an EBITDA to cash flow conversion of 97%. The gearing measured by net debt/EBITDA was 2.47 times as at 30 June 2015. The final dividend of 3.7 cents per share works out, in accordance with the dividend policy, to a payout ratio of 70%.
Healthscope Medical Centres (Source - Company Reports)
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FY 2015 has been a successful year for the company and the revenue strategies combined with costs strategies focusing on labour and procurement which contributed to the success will continue to deliver further improvements in FY 2016. The second half of FY 2016 will also see the commissioning of large capital projects which will set the foundation for accelerated growth in FY 2017.
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We believe that the move to sell the Australian pathology operations which were a drag on the other businesses should benefit the group as a whole because it can now devote all its attention to the more profitable operations. The group should continue to benefit from the trend towards greater private healthcare and the ageing population in the areas in which it operates. It may seem a little bit pricey at the current P/E ratio but we believe that it is a good long-term growth stock and rate it as a Buy at the current price of $2.63.
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