Stocks We Like – Healthscope
Australia’s population is ageing, yet the public and private hospital systems are growing at very different speeds. Public hospital beds grew by 1 per cent each year between 2010 and 2014, compared to 3 per cent annual growth in the private system. Increasing demand for hospital care will flow to operators that are expanding capacity, which means that major private hospital companies like Healthscope (ASX: HSO) and Ramsay Health Care (ASX: RHC) are well placed to grow earnings over the long term.
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.
INVEST WITH MONTGOMERY
Darren Chalkley
:
Hi Ben, I would be very interested in your thoughts on the recent pull back. Is your investment thesis still in tact?
Roger Montgomery
:
Yes.
Andrew
:
You mention RHC. RHC has extremely high debt levels. Whilst funding costs are currently low, wouldn’t it be best to avoid RHC until debt levels become more reasonable?
Ben MacNevin
:
Hi Andrew,
RHC is a very competent operator and through its history it has effectively levered and de-levered with investments. I encourage you to look at their presentations where they include a graph of their leverage – referred to internally as “The Ramsay Snake”. In this context, access to cheap debt with a strong investment pipeline in a very stable industry are valuable characteristics.
Andrew
:
Thank you Ben. Incredibly helpful as always
Andrew
:
Hi Ben,
I really enjoy reading your posts, and in particular, this analysis of Healthscope. I note however that the current ROE is around 9% with a high dividend payout ratio. Debt to Equity is close to 50%. While the current intrinsic value is calculated at $1.02 and while forecast to increase at approx. 19%, the market price is around $2.75. The company doesn’t seem to be ticking many of the key criteria in stock selection. Am I missing something?
Regards
Andrew
Ben MacNevin
:
Hello Andrew,
Great question. Healthscope’s historical return metrics have been impacted by the float and its debt is elevated due to its investment pipeline. For reasons outlined in the article, we expect its profitability to be higher in the years ahead, and that is important with the valuation as it’s an assessment of the returns on future capital deployed.