Woodford Investment Management LLP is a major shareholder in UK-focused independent hospital company Spire Healthcare Group (LSE: SPI), which released painful-looking full-year results today. Underlying revenue was up only 1% compared to 2016, operating profit before exceptional and other items slipped almost 15%, net cash from operations plunged just over 30% and adjusted earnings per share crashed 25%. I had to look hard to find a significant ‘positive’ figure, but found one in net debt, which rose just over 7% — the one number we’d like to show a decline!
Demand rising fast
The directors bravely held the total dividend at last year’s level. It seems clear that we are looking for a turnaround in fortunes with this company, which is a major provider to the National Health Service (NHS) and runs 39 private hospitals, 11 clinics and one specialist cancer care centre. Chief executive Justin Ash told us in the report that the firm saw “challenging trading conditions in the NHS segment and a relatively flat insurance market” during 2017. He also owned up that “the business did lose some focus due to issues at our new-build facilities in particular, which distracted from core operations and strategic development.”
However, there were chinks of light during 2017 including “promising growth in Self-pay revenue, patient admissions, and increases in average revenue per case.” The firm’s biggest customer, the NHS, has the power to make or break the trading outcome in any particular period and Mr Ash said that in 2017 “eReferrals accounted for 86% of our NHS revenues, which offset some of the impact from local contract reductions.” He set out the bull case for investing in Spire by explaining that demand for healthcare provision by the independent sector looks set to continue to rise fast because the NHS remains severely financially constrained.
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Perhaps such increasing demand will propel Spire into a turnaround along with funeral-related services provider Dignity (LSE: DTY), which is a firm operating as a kind of backstop in the healthcare sector, so to speak.
Rebased profits
For a long time, we investors assumed that Dignity operated a defensive business with lots of predictable cash flow that it could use to service the debt it needed to consolidate the undertaking industry by buying up the funeral director competition. However, the wheels wobbled under that idea when it became clear that people have endured quite enough of high funeral prices and are now shopping around for the best deal when it comes to dispatching loved ones. The outcome is that Dignity’s earnings are set to crash around 50% during 2018 as it pursues a policy of more-competitive pricing going forward.
At today’s share price around 812p, the forward price-to-earnings ratio is around 12, which is much lower than the ratings in the 20s we’ve been used to. If the firm can keep its rebased level of profits and cash flow steady from here, we could be seeing a decent entry point to hold for ongoing, though less profitable, growth as the company continues its acquisition policy.
