- FY17 underlying results were below expectations, weighted down by continued soft conditions, cost pressures and volatile case mix in the core Hospital division.
- Increased competition and ramping VIC greenfields further pressured Hospital
earnings, pushing it below expectations and guidance, and offsetting strong above
market gains from brownfields, which remain on track and on budget.
- While guidance targeting flat Hospital profit isn’t a confidence builder, not unlike
Oct-16 profit warning, brownfields are ramping, core portfolio growth is improving and fundamentals remain unchanged, setting a conservative bar for the new CEO.
- We have lowered our FY18-20 earnings estimates modestly, with our DCF/SOTP target price declining to A$2.53. Shares are too cheap…maintain Add rating.
FY17 result – Below expectations on an underlying basis…
FY17 results were below expectations, with underlying EBITDA increasing 3.5% (Morgans A$428m; Bloomberg consensus A$430m) on revenue of A$2,318m (+3.8%). Underlying NPAT fell 5.6% to A$180m (exclude A$17.4m in non-recurring charges), impacted by higher D&A (+17.4%) and net interest expense (+20.3%). Underlying operating margins contracted 10bp to 17.7%. OCF A$481.2m (+6.89%) was solid and cash conversion strong (101.6%), supporting a 70% payout ratio (Final div 3.5c, -10%) and B/S (ND/EBITDA 2.7x; ex-Northern Beaches Hospital debt as it is refunded upon project completion YE18).
…but core biz hit by ‘temporary’ VIC issues; ROW path solid
The core Hospital division disappointed (rev +3.4%; EBITDA +1.3%; margin -40bp to 17.8%), impacted by several well-flagged issues (eg soft market, case mix variability and higher costs) and recent concerns (eg VIC competition and ramping greenfields). Excluding VIC issues (A$11m), the division would have met guidance (EBITDA +2.3% vs +2.2% guided). NZ pathology was the standout (rev +8.9%; EBITDA +17.7%; margin +180bp to 24.6%), while growth in Other (ie Malaysia, Singapore pathology) was impacted by FX (rev -1.3%; EBITDA -0.4%, margins +30bp to 29.5%), but improved on a local currency basis (Singapore EBITDA +2.9%; Malaysia +4.2%).
Sell off is overdone; retain Add
Understandably, HSO needs to show strong hospital earnings growth to rerate. While this will not happen overnight, shares look attractive, especially on a multiyear view.
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Disclaimer(s): Analyst owns shares.
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.