Healthscope Ltd


HSO Details

Sale of standalone medical centres operations: Healthscope Ltd (ASX: HSO) has entered into an agreement to sell its standalone medical centres operations for A$55 million to Fullerton Primary Care Pty Ltd (subsidiary of Fullerton Australia). The transaction is expected to be complete by the end of September 2017. Healthscope’s standalone medical centres operations consist of 43 medical centres, four specialist skin clinics and one specialist breast diagnostic clinic located across Victoria, New South Wales, the Australian Capital Territory, Queensland and Western Australia. In the first half of FY17, the standalone medical centres operations contributed approximately 2% of Group Operating EBITDA. Further, HSO expects to book a non-cash impairment loss of $54.7 million in relation to the sale to be recorded in the FY17 financial results. Divestment of the Medical Centres operations is part of its strategic review and it will allow the company to focus on core hospitals and international pathology operations. As part of the transaction, all existing medical centres employees will be offered continued employment with the business going forward.

Fullerton Australia is part of Fullerton Healthcare Corporation Ltd (Fullerton Health), a leading regional healthcare provider with more than 220 medical centres across the Asia Pacific region. Fullerton Health is headquartered in Singapore and has operations in Australia, Singapore, Malaysia, Indonesia, Hong Kong, China and New Zealand. Fullerton Australia is a multi-disciplined and diverse healthcare company employing over 800 staff and, providing services through 70 facilities throughout the country.

Stock Performance: The stock has declined 27.5% in the past one year, while it is flat for the last three months (as of August 17, 2017). However, progress at Northern Beaches Hospital and ongoing projects’ contribution in the 2HFY17 are worth noting. Further, the present divestment move will help the group focus on hospital and pathology operations. We reiterate a “Buy” recommendation on the stock at the current market price of $2.17
 

HSO daily chart; (Source: Thomson Reuters)
 
Primary Health Care Ltd


PRY Details

Impacted by impairment charges: Primary Health Care Ltd (ASX: PRY) has reported 4.9% yoy (year on year) decline in underlying NPAT at $92.1 million and free cash flow of $83.6 million for FY 2017, despite a repositioning of its Bulk Billing Medical Centre division. However, the group recorded a reported loss after tax of $516.9 million, driven by a non?cash impairment charge of $587.0 million related to Medical Centres goodwill and underperforming sites, including the old Symbion sites. The company also invested $39.2 million in restructuring and strategic initiatives and recorded $18.1 million of non?recurring items. Notably, improvement in free cash flows was led by capital?light recruitment contracts for healthcare practitioners (HCPs) and capital discipline. Importantly, Primary self-funded its $128.6 million of capital expenditure requirements and $58.4 million of dividends, and reduced net debt by $35.5 million.


Financial summary; (Source: Company reports)

The company’s pathology division has delivered above?market revenue growth and continues to expand its operations into specialty areas including dermatopathology. Imaging has performed strongly as its EBIT contribution increased ~30%, led by the realignment of the business model to higher margin activities, and cost control measures. Within Medical Centres, the company has changed its revenue sharing arrangements with GPs and significantly reduced capital costs. During the year, 153 GPs joined Primary Bulk Billing Medical Centres across the country, and witnessed retention improvement across the cohort. Under the new recruitment models, it has significantly reduced upfront costs and thereby improved free cash flow. However, to balance the value proposition, the revenue sharing arrangements have increased in favour of the GPs. Despite this shift in the division’s revenue metrics, revenue remained relatively steady at $317.8 million compared to $328.7 million in FY 2016, and the division has a solid recruitment pipeline moving into FY 2018.
Stock Performance: The stock has fallen 14.5% this year to date (as at August 17, 2017) at the back of challenging environment. Given the company’s performance and trading levels, we maintain an “Expensive” recommendation on the stock at the current price of $3.63
 

PRY daily chart; (Source: Thomson Reuters)

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