Primary Health Care

About the author:

Author name:

By Dr Derek Jellinek

Job title:

Senior Analyst

Date posted:

24 November 2015, 12:51 PM

Sectors Covered:

Healthcare

Key points

• Profit expectations were marked down for the third time this year, targeting underlying EBITDA and NPAT c5% below FY15 levels.
• Notably, weakness in physician engagement in the core Medical Centre division raises questions around the bulk-billing model and new flexible salary packages.
• We lower our underlying EBITDA by up to 10.1%.

Headwinds for all divisions...

Primary Health Care (PRY) lowered earnings for the third time in less than a year, targeting FY16 underlying EBITDA and NPAT c5% below FY15 (A$380m and A$113m, respectively). Management flagged "margin compression caused by a subdued revenue environment", with all divisions affected:

• Medical Centres (c45% of EBITDA) - flat revenue growth due to the Medicare rebate indexation freeze and low physician numbers at the start of the year;
• Pathology (c40% of EBITDA) - lower growth rates due to prior fee cuts and collection centre costs; and
• Diagnostic Imaging (c20% of EBITDA) - "subdued revenue growth, likely the consequence of regulatory uncertainty and the impact on referral patterns".

...but management is optimistic things will perform from here

However, management did attempt to temper its negative update with some optimistic comments:

• Medical Centres - FY16 recruitment and retention ahead of expectations and physician numbers likely to improve with new flexible recruitment packages;
• Pathology - improved 2H margins as it focuses on underperforming sites (closed 48 to date), cost-out initiatives and lower cost pressures following the Government retention of collection centre deregulation; and
• Diagnostic Imaging - a "performance improvement" plan has been developed to reduce costs and close underperforming sites.

Looking forward, management aims to "drive top-line growth by becoming the partner of choice for healthcare practitioners, supported by flexible recruitment models and the roll out of large-scale medical centres".

The key question - is PRY a place where doctors want to work?

While we acknowledge uncertainty around the ongoing Government reviews may have slowed Diagnostic Imaging volumes, and Pathology is just starting to cycle prior fee cuts, we are somewhat surprised that the core engagement levels have not been fully restored post the ambiguity around the ATO payment decision and confusion with Government co-payments last year. 

We believe it draws into question the viability of the bulk-billing model (ie good for patients, but not good for doctors), with new 'flexible' recruitment packages perhaps not providing enough incentive at a time when the pressure is clearly increasing on general practices and patients are staring at higher out-of-pocket costs for their healthcare.

We need evidence the business is moving in the right direction

Reflecting risk in the model, we have lowered our underlying FY16-18F earnings by up to 10.1% and have reduced our share price target. We maintain our Hold recommendation.

More information

Morgans clients can access our detailed research on Primary Health Care (PRY). If you are interested in finding out more, please contact your nearest Morgans office.

Disclaimer: The information contained in this report is provided to you by Morgans Financial Limited as general advice only, and is made without consideration of an individual's relevant personal circumstances. Morgans Financial Limited ABN 49 010 669 726, its related bodies corporate, directors and officers, employees, authorised representatives and agents (“Morgans”) do not accept any liability for any loss or damage arising from or in connection with any action taken or not taken on the basis of information contained in this report, or for any errors or omissions contained within. It is recommended that any persons who wish to act upon this report consult with their Morgans investment adviser before doing so.