About the author:
- Author name:
- By Dr Derek Jellinek
- Job title:
- Senior Analyst
- Date posted:
- 26 August 2016, 11:44 AM
- Sectors Covered:
- FY16 underlying result was solid and broadly in-line, underpinned by strong performances in the core Hospital and New Zealand Pathology divisions.
- Encouragingly, operating efficiencies via case mix, layout and procurement initiatives continue to deliver hospital margin uplift, while capacity expansion programs remain on track and on budget.
- While wary of cost pressures and ongoing government reviews, we continue to view underlying growth drivers as intact, with a strong focus on quality and clinical outcomes and brownfield pipeline supporting continued momentum.
FY16 results broadly in-line
FY16 results were solid and broadly in-line, with adjusted NPAT (ex A$11.8m in non-recurring items) increasing 25% to A$194.6m on revenue of A$2,291m (+6.2%). Underlying EBITDA grew 7.1% to A$407.9m and margins expanded 10bp to 17.8%. While operating cash flow of A$391.7m (+3.7%) growth was impacted by higher accrued revenue in coding and billing, it is only temporary, cash conversion was still strong (c96%), supporting 5% dividend growth (payout ratio 70%).
Core business delivering
The result was underpinned by strength across the core Hospital division (EBITDA A$354.9m, +8.3%; margin +50bp to 18.2%), with seven expansion projects completed (three in 2H; 163 beds, 9 theatres), and New Zealand Pathology (EBITDA A$50.7m, +21.8%; EBIT margin +90bp to 18%), offsetting softness in other divisions (pathology in Malaysia and Singapore and Australian medical centres) on market softness and higher costs. The balance sheet is strong with ample capacity to support future growth.
The best is yet to come
We believe FY16 results demonstrate strong execution as they were driven mainly via organic growth and ongoing cost savings. While FY17 outlook was merely qualitative, we concur with management that it remains "well-positioned to meet future demand" as on-time/budget brownfields (ten projects underway, 762 beds, 43 theatres end of FY19) "continue to lay the foundation for strong growth over the medium term" in catchments with strong fundamentals (i.e. a growing and ageing population) despite industry growth moderating "slightly" and ongoing political/regulatory "noise".
With an earnings trajectory ticking higher and shares trading at a discount to Ramsay Health Care and global peers, we continue to view Healthscope (HSO) as a core portfolio holding. We maintain our Add recommendation.
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