The share price of private hospital group Mediclinic International (LSE: MDC) is down around 5% today as the market digests yet another mixed financial update from the firm. On the positive side, the company’s Southern African assets continue to perform well with local currency revenue up 4.1% and margins creeping upward. However, this performance was cancelled out by a decrease in revenue and margins in both its Swiss and UAE hospitals.
Overall, in constant currency terms, group revenue was flat and underlying EBITDA was down 5% year-on-year (y/y). While both revenue and profits were up in real terms due to the weak pound, investors should mainly concern themselves with how the business is actually performing since management can’t control currency movements.
Aside from South Africa, there was some good news on this front in the six months to September as management disclosed it was confident that struggling Middle Eastern operations would post positive sales and profit growth in H2. This is good to hear as some of the group’s hospitals in the Emirates have struggled with high staff turnover and weak demand following their acquisition. The company says doctor vacancies have now stabilised, but unfortunately the local market remains highly competitive, which is likely to keep margins well below group average for some time.
Overall, the company is not one I’d like to invest in today. Net debt following the reverse takeover of Al Noor Hospitals in 2015 is still relatively high at £1.6bn or 3.3 times full-year EBITDA, and problems in the UAE business have proven stubbornly difficult to put right. Add in a lofty valuation of 21 times trailing earnings and I see better places to invest my cash.
Utilising all the tools it has
One company that’s caught my eye is water utility Severn Trent (LSE: SVT). It offers a solid 3.9% dividend yield and trades at 14 times earnings, despite its share price rising a respectable 27% over the past five years.
While regulated utilities are far from growth stars, Severn Trent’s management team has proven very capable of squeezing extra profits out of the business by cutting costs and exceeding regulatory efficiency targets that come with multi-million pound incentives.
For the year to March 2018, it is targeting outperforming outcome delivery incentives to the tune of £23m. On top of these bonus payments, management has found some £770m in cost efficiencies over the five-year review period from 2015-20. Together these have supported steady dividend increases while keeping customers’ average water bills the lowest in the UK.
Looking forward, the firm is prepared to see its regulated rates fall for the 2020-25 review period as regulators want to lower utility bills for consumers. This will, of course, be bad news for Severn Trent, which is why its share price has dropped 16% since May. But unlike competitors, it has proven very capable of cutting fat and hitting targets to maintain and grow profits.
With a bumper dividend, great recent operational history and increasingly attractive valuation, Severn Trent is one stock well worth a closer look.
