ANALYST’S NOTE

Healthscope (HSO) reported results which reflect a Company in a transition year. Revenue was up +3.7%, Operating EBITDA declined -4.4% whilst operating NPAT declined by -10.3%. 6.7cps full year dividend equates to 70% of Statutory NPAT (continued and discontinued) adjusted for other income and expense items.

HSO’s largest segment, its Hospitals division delivered operating EBITDA of $344.7m, a -4.1% decline from FY17 but at the top end of HSO’s revised guidance.

On a positive, on the analyst call, management highlighted that in “performance significantly improved in the second half reflecting the benefits of operational efficiencies, new leadership in Victoria and Tasmania and contributions from brownfields”. The share price trades at a slight discount to April 2018’s $2.36 cash per share unsolicited proposal from a consortium of financial investors to acquire all of the shares in Healthscope by a way of a scheme of arrangement. Reiterate Neutral recommendation, however, if it begins to trade at a more significant discount, with quality assets, HSO would be worthwhile considering.

• Guidance – management targets “FY19 Hospital Operating EBITDA growth of at least 10% compared with FY18”:

1. FY19 growth capex planned to be $190 – 200m (inclusive of $105m relating to northern beaches hospital);

2. FY19 depreciation and amortisation planned to be ~$124m inclusive of Northern Beaches;

3. FY19 Net Interest Expense is expected to be ~$54 -58m. 

• Hospitals (~86% of EBITDA). Revenue growth of +4.3% driven by completed and maturing brownfield expansion projects. EBITDA declined -4.1% to $344.7m and was impacted by VIC/TAS which was down $15.6m, including $7.4m EBITDA losses incurred across Geelong Private, Cotham Private and Frankston Private hospitals. Overall EBIT margins (12.0% versus 13.5% in FY17) were impacted by case mix variability and wage indexation above health fund price increases in VIC/TAS.
• NZ Pathology (~14% of EBITDA). On constant currency basis, revenue growth of +1.6% translated to EBIT increase of +2.5% and solid margins of 24.2% (albeit slightly lower than the 24.6% achieved in FY17).
• Asian Pathology sold. HSO divested its Asian Pathology operations in Singapore, Malaysia and Vietnam (completed on 17 August 2018). $279m cash proceeds equate to EBITDA multiple of 13.7x based on FY18 earnings and 15.3x based on FY17 earnings. The gains on sale of ~$165m (pre-tax) will be recognised in FY19 and net cash proceeds used to pay down debt.
• Establishing new unlisted property trust. Management completed a strategic review of freehold hospital property assets and proposes to establish new unlisted property trust to hold majority of freehold hospital property assets and lease back to HSO. HSO will own majority interest in the trust. New co-investor to hold up to 49%. HSO is currently seeking formal proposals from a preferred co-investor. Hospital properties to be transferred have a book value for land and buildings of ~$1.0bn and at those locations generate ~65% of FY18 Hospitals Operating EBITDA.