Takeaways from Healthscope's investor day

Morgans Financial Limited

Senior Analyst Derek Jellinek attended the Healthscope investor day earlier this week. Below are his comments as made in a Morgans presentation afterwards. Transcription follows, with full video below:

Reiterating guidance

"The key takeaway here is they reiterated their guidance now. It's not that great. It's for flat hospital growth. I would say this is in a very challenging operating environment, where there's a lot of volatility and cost pressure. So, I take it away that it was good to see them reiterate that guidance.

I wasn't expecting them to change their guidance, but there was scuttlebutt in the market that they would. Given six weeks ago at their AGM, they did reiterate that guidance there. They did say that it was pleasing Q1 performance, which is good to hear for the first time as well. And their top line in the first half seemed to be trading above the market rates, so that was also pleasing to hear.

They're obviously talking about the challenging operating environment, and as we all know, very very very focused and very confident in costing out to drive efficiencies in what they're calling a new world. And you guys know it's affordability issues we hear every day in the press. It's pretty much a beat up. So it's good to see them kind of pushing through via benchmarking and best practices across the whole entire 45 hospitals in their portfolio. They're really kicking the tyres across all those assets.

Now we wanted to really get a quantum for that. They're a little hesitant. They put it in terms of tens of millions of dollars of savings going into fiscal 19. They said they'd give us a broader update in the first half, so look for more colour around the actual quantum of that number into fiscal 19, coming in the first half, 18 results obviously. But the event really wasn't a trading update. These are not held for that reason.

Northern Beaches Hospital

It was really to showcase their new Northern Beaches Hospital. This is a very impressive state-of-the-art facility, $840 million in this hospital over a three year period. It's still in the construction phase. That construction should finish though before Christmas. And internal fitouts before March of next year. This is the first foray for the company into a private-public partnership or a PPP, where you're going to have public as well as private patients in one integrated facility. So it was a very very interesting facility. One of its only kind here in Australia.

Ramsay has five PPP's, but those hospitals are normally retrofitted. So this is really the first prospectively actually integrated constructed hospital of its kind here in Australia. Very very impressive as I said.

More importantly, the management did talk about for the first time what the impact of this private hospital Northern Beaches Hospital will be. And the P&L impacts. So let me run you through the kind of key takeaways that came out from that.

Construction and commissioning, as I said, is on time and on budget. And as I said, this is a three-year process, so it's really good to see that coming in actually quicker than they thought. So they have 68 contingency days they said, which is good. This is a 450-bed hospital, 250 of which are public, and 200 are private. They flip on the lights the 31st of October next year. So as I said, that's about 60 odd days as I mentioned quicker than what they were going to do. They were going to do it at the end of December next year, so it's good to see that coming online quicker.

Future profitability of the Hospital

The return measures on this project are no different to the rest of their Brownfield projects. Remember those ROIC's are over 15% on a three to four-year view. So that's still along lines with their targeting as well. The encatchment is really strong. The encatchment is 250,000 people live in this encatchment. Private health insurance is above 60%, hasn't really deviated or waned from that mark of late. That's above the national average of course. And 80% of the encatchment that have private health insurance actually leave the encatchment to get their healthcare services outside the hospital systems because the current hospitals there don't give the quality of care to those patients. So this one will fill that void, which is good to see.

They're saying they have very strong interests from physicians. Physicians have actually been used as input for design in this hospital and interestingly enough, for the first time I heard, they're actually interviewing physicians for consulting suites. Now normally that doesn't happen in the private system. Normally they just get all comers that come in. So for them to interview people, they said they have over 300 positions that have expressed interest, is very good because they're cherry-picking their docs. These docs will come with patients and the hospital will be filled day one.

They're saying this is a big active "high volume site". They're confident that the 250 beds on the public side will be filled very near term, and they're forecasting profitability first year. I think that's an impressive feat for the market. Because we didn't really have that in our numbers. And I don't think anyone on the street would have that in their numbers, profitability in year one. However they're saying the top line revenue over 300 million likely to come up three to four years into their ramp with their margins, EBITDA margins that is roughly the same as the group margins, or roughly 17.5%. So that's quite good.

They're talking about their capital payment. Now remember that this project is fully funded by Healthscope, but the New South Wales state government will give them a check for $435 million upon completion commissioning of this hospital. Now the market's always been concerned about the balance sheet flexibility. Because net debt to EBITDA currently stands at 2.7, that will ramp to around four times. That's pretty tight for this company. However, that payment they're saying they should get on the balance sheet by the end of next year, so December next year. Which is good help that I believe will alleviate the market's concern that the balance sheet is under stress or strain here.

So I really came away with really a better appreciation for this actual project. I'm a little more optimistic I would say at the company's future prospects. That being said, I can feel management's general sense of urgency for cost down and efficiencies, running a ruler, as I said, across all the 45 assets.

Utilisation, however, in this environment remains difficult. It's soft, it's sluggish. Affordability comes up every day, as I said. I'm still happy to maintain my add rating in this name on medium-longer term view. However, I'd caution you that there's a lot of execution risk in this story. I was sitting outside the hospital and looking at the big pile of dirt, thinking Jesus, there's a lot to be done yet for this facility to kick on, get the patients, get the physicians on board, and have them make a profit.

They're targeting the first year. Will the market give them the benefit of the doubt, the people I talked to, and there's probably 30 or 40 people at this event. It was well attended. Not so convinced because let's face it, Healthscope has kind of struggled with their Greenfield projects, and this is one of those projects. So they're a little more hesitant. They want to see it reflected in the numbers. But I think at the current trading levels, it's trading on a forward multiple roughly around 18 times.

I think that's reasonable for what it is, but like I said, for active traders out there, I would say be a little light on your toes near term. Good to see second half momentum if they can get it, but execution risk with their Northern Beaches is still on the table even though I do like the story still."


Morgans Financial Limited

Morgans is Australia's largest national full-service retail stockbroking and wealth management firm, with more than 300,000 clients, 500 authorised representatives and 850 staff, operating from offices in all states and territories. As well as...

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