strong returns

Australia’s second-largest private hospital operator has grown rapidly by acquisition. In 2005 HSP made two transforming acquisitions: Gribbles Pathology for $415m and 14 hospitals from Affinity for $490m. EBITDA contribution is split between Hospitals at 80% and Pathology at 20%. The integration of pathology into hospitals protects referrals from an increasingly competitive industry. Scale, buying power and strength to negotiate with health funds provides the capacity to deliver earnings growth. The immediate focus is investing capital into increasing the capacity of its facilities to meet the growing demands of an ageing population.

Result Description
Healthcare has been the worst-performing sector over the last few weeks as investors reduce holding to the “expensive defensives” and start to build positions in cyclical stocks, which offer higher leverage to any turnaround in economic conditions


We take a long-term view in evaluating a business and determining estimates for its ability to generate cash. HSP, like many other healthcare stocks, delivers consistent revenues despite economic fluctuations because many health-related services are a necessity. If you, your child or loved one gets sick we scrimp, borrow or save to ensure the best level of care available.


Impact
As we said in our last RHC article, both companies benefit from the slowdown in economic conditions. HSP says it now achieves 20% to 25% better pricing on tenders for capital expenditure. As HSP is spending $250m on expansion projects we can now expect greater returns than initially planned.


CEO Bruce Dixon says we are all aware of the aging demographic impact on demand for healthcare but it has only just begun to really materialise for a range of health-related services. HSP's 1H hospital revenues increased 9.3%, with the larger hospitals posting double-digit growth.


A period of under-funding in the public system and the time it takes for government bureaucracy to act means we see little threat to the private initiatives to expand and establish centres of excellence, which will further differentiate private hospitals from the public system. HSP says new infrastructure offers specialists high quality equipment and working conditions. The premium infrastructure draws the best specialists, making it the place to go.


HSP offers investors a very strong yield and we see no reason it can’t duplicate RHC’s returns on capital. We retain Buy recommendations for both companies.