Healthscope: On Time, On Budget, Encore!
Healthscope is investing heavily in its hospitals to accommodate Australia’s growing demand for health care. Its 2016 full year result indicates they’re well on track to deliver margin expansion and strong earnings growth over the coming years.
Healthscope (ASX: HSO) grew Hospital EBITDA margins by 50 basis points for the 2016 full year, though 90 basis points of expansion was achieved in the first half, compared to a 10 basis point expansion in the second half. The second half margins were softer than we expected, but this was due to the completed development of the Gold Coast Private Hospital which needed to ramp-down and ramp-up while patients were transferred. With such a large investment pipeline, Healthscope’s margins are likely to fluctuate in the short term as major projects are completed, but we remain confident that margins will expand materially over the long term due to favourable industry fundamentals. Pleasingly, management confirmed that all capital projects are on time and on budget.
These favourable tailwinds are outlined in our thesis that we published in June 2016 (accessible to exclusive subscribers of the blog). In short, Australia’s population is growing, living longer, and utilising health care more, but the public health care system is not keeping pace with this growth.
Healthscope not only provides services more economically than the public system, it is able to construct facilities at a lower cost as well, which could serve as a compelling proposition for Governments as public pressure mounts from rising private health care premiums and longer waiting lists.
We expect the private sector will be required to service this excess demand. For an experienced and major operator like Healthscope, this should translate to increasing volumes, expanding margins and ultimately strong earnings growth for shareholders over the long term.
Montgomery funds own shares in Healthscope.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
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