Things aren’t getting much better for fund manager Neil Woodford. Today has seen another of his fund’s stocks, private hospital operator Spire Healthcare (LSE: SPI), fall by more than 15% after a surprise profit warning.
Despite this sharp fall, the group’s underlying business seems fairly healthy. So is this falling knife a potential buy?
Spire needs the NHS
Simon Gordon, chief executive of private hospital operator, believes in a “medium-to-long term growth opportunity in UK private healthcare”.
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I suspect Mr Gordon is correct, but the firm’s recent growth appears to have been driven by NHS referrals. These account for about 31% of revenue, but are now falling. This decline forced Spire to issue a profit warning with its half-year results this morning, triggering a sharp sell-off.
Revenue during the second half of the year is now expected to be flat, with profit margins slightly lower than last year.
It’s not all bad
Today’s half-year results weren’t that bad. Revenue rose by 2.4% to £481m, while earnings before interest, tax, depreciation and amortisation (EBITDA) fell by 1.5% to £83.2m.
Net debt was broadly flat at £436m, despite the firm spending £59.5m on new hospitals. This seems to support Spire’s claim of strong cash flow performance, with a reported 97.6% of EBITDA converted to cash.
Just one problem
Nearly a third of Spire’s revenue comes from NHS referrals. About 45% comes from health insurance referrals. Self-pay — where patients without health insurance choose to pay for a procedure — accounts for about 20%.
Today’s results suggest that insurance revenue is flat and warn of a slowdown in NHS referrals. The only hope seems to be self-pay, where revenue rose by 14% during the first half.
My concern is that self-pay growth may not be strong enough to make up for shortfalls elsewhere. I estimate that the shares trade on a P/E of around 16 after today’s slide. I’m not sure that’s cheap enough to justify a buy. I’d stay away until we learn more about trading conditions later this year.
A sure thing?
One of Neil Woodford’s biggest holdings is tobacco giant Imperial Brands (LSE: IMB).
The group’s share price has lagged the FTSE 100 this year, dampening the performance of Woodford’s big income funds. But in this case at least, I’m fairly confident that Mr Woodford’s faith in Imperial is likely to be rewarded.
The tobacco group’s shares are currently trading at a two-year low, having fallen by 16% over the last year. But I think the stock may be reaching a level at which it looks distinctly undervalued.
Imperial’s free cash flow remains formidable. It’s worth noting that the group has used its surplus free cash flow after dividends to repay £1.2bn of debt over the last 12 months. The group’s commitment to 10% annual dividend growth remains in place and a payout of 171p is expected this year, giving a prospective yield of 5.2%.
The stock currently trades on just 12 times forecast earnings for 2017. This compares favourably with rival British American Tobacco, which trades on a forecast P/E of 17 with a yield of just 3.8%. In my view, Imperial could be a sound buy at current levels.
