We have been bearish on Healthscope (HSO) for a while. Having fallen quite a bit in the last year, especially compared to other healthcare stocks, is it now time to jump in?
Whilst new projects are considered low-risk and high return, the extent to which the market is prepared to factor in the future positive earnings contribution from these are tempered by the more immediate challenges faced by the core Hospitals division. This points to the potential for HSO to issue a further downgrade to, or not meet, its stated guidance.
In particular, the Company commented at the 1H17 results release that if the issues with soft industry volumes and case mix variability continue; then EBITDA growth in 2H17 is expected to be similar to 1H17 EBITDA growth of 1.2%. This indicates that the underlying Hospitals division continues to underperform both the industry and its key competitor, Ramsay Health Care.
Coupled with these factors, other risks/issues of concern to the market include:
- Timing relating to the commissioning, and inherent challenges, facing the Northern Beaches Hospital PPP;
- HSO’s cost savings program are yet to deliver meaningful results and
- The appointment of a new CEO (Mr Gordon Ballantyne) effective 15 May 2017 who comes from a non-hospital operational background.
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While these factors are reflected in the stock currently trading on a 1-year forward P/E multiple (of 17.8x) below the average over the last two years of 22.8x, we consider that HSO is not trading on an attractive enough multiple relative to its EPS growth profile (4.5%- 5.0% in FY17 and FY18; before EPS growth of at least double digits kicks in FY19 driven by the hospitals expansion program).
When it comes to how the chart looks, our most recent analysis was back on 25 October when it got smashed from over $3 and was trading at $2.24. Despite the chorus of calls to buy it, we stated that the chart suggested to expect even further downside. Our comment in our research note at the time was that HSO “is likely to dip under the recent low of $2.12. We may even see the stock with a “1” in front of it.” This week saw HSO trade as low as $1.975 intraday. Now that the stock is washing out the sellers, it has a chance of bouncing here.
Given the issues already mentioned, some investors may want to start accumulating only a small amount here because of support on the chart. If the above-mentioned risks fail to materialise, then those same investors may wish to accumulate some more. However, we remain cautious on the outlook for now.
The above commentary is an extract of our research report dated 30 May 2017.
Michael Gable is managing director of Fairmont Equities.
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