The Private Health sector faces many challenges, profitability is falling for private health operators and private health insurance is appearing embattled. In the healthcare sector, major operators of private hospitals, multi-disciplinary medical centres, pathology and radiology are outlaying huge sums of capital yet battling with under-performing divisions, increased costs and competitive pressures. I want to summarily expand on these issues to better understand the sharp fall in share price we saw in three large Australian Healthcare Businesses.
Roy Morgan surveys conducted in 2017 say that consumer sentiment is falling in the Private Health Sector. They interviewed 50,000 people and the results can be seen below. Health Insurance premiums are increasing well ahead of CPI. Exclusionary policies are on the increase in 2001 there were 163,000 exclusionary policies compared to September 2017 where there were 2.24 Million exclusionary policies. Co-payment policies have increased substantially too from well under one million co-payment policies to the 2017 numbers 2.24 Million policies requiring the payment of a gap, or co-payment.
I started some discussion on social media with consumers with a mixed response. Some members were very pleased and happy to recommend while others stated cost or the lack of benefits they received made it a questionable expense. Other folks suggested they would prefer to invest the money they are spending on private health where it could generate a compounding return, in the meantime relying on the public health system.
ASX listed Private Health Operators have invested billions in new infrastructure and facilities providing more beds and space for a simultaneously growing and ageing population. Over the past several years investment has been ramped up by HSO, based on projected demand. The Health Resources and Services Administration anticipate a shortage of primary care health practitioners in excess of twenty thousand by 2020 which could cause further upward pressure on wages. More recently in 2017 Private Health Care providers such as Healthscope (HSO), Primary Healthcare (PRY) and Ramsay Healthcare (RHC) have seen significant falls in their share price.
Figure 1 The Guardian
|Total Debt: Total Liabilities||49.63%|
|Return On Equity||6.883%|
|Return on Total Capital||3.467%|
|Net Profit Margin (2017)||7.03%|
Summary: Operates private hospitals and pathology centres overseas
Healthscope has invested $1,587 Million since 2013 into fixed assets as they deliver on their pipeline of projects during their self-proclaimed growth phase. According to recently appointed CEO Gordon Ballantyne, the company expects ongoing volatility and cost pressures moving forward for the medium term. This sentiment was echoed today by analysts on Sky Business discussing the current position of competitor Ramsay Healthcare (RSC). Over the past few years, HSO has divested themselves of their underperforming Australian Pathology and Medical Centre Division for less than book value resulting in an impairment of $55 Million dollars in 2015.
2017 results saw their market value fall to around 25% in a day as annual figures showed slow earnings growth (around 4% year on year) and Earnings per Share down 9%, Net Profits after Tax down by the same amount. Healthscope has been investing heavily in pipeline projects growing their long-term debt over the past three years to $1,802 Million; 11.05 x Net Profit. This means all else being equal it will take a very long time to pay off the long-term debt using all profits generated. Return on Equity sits at 6.883% and Return on Total Capital is at 3.467% which leaves little left over for the shareholder.
Ramsay Health Care: RHC
|Total debt: Total Liabilities||71.9%|
|Return on Equity||21%|
|Return on Total Capital||5.82%|
|Net Profit Margin||5.62%|
Ramsay Health Care is a global hospital group with a wide range of services from day surgery to acute psychiatric care. Ramsay has poured $1,938 Million into Capital investment over the past 5 years. Their long-term debt is at 6.67 x Net Earnings. Ramsay’s total liabilities seem to have peaked for now at 72% of total assets. Return on equity is consistent at an average 20% per year, however, due to high debt levels, their return on capital is less appealing at 5.825%. Ramsay Health Care historically has a consistent low net profit margin of 5% give or take over the past 5 years.
Primary Health Care: PRY
|Total debt: Total Liabilities||39.98%|
|Return on Equity||21%|
|Return on Total Capital||5.82%|
|Net Profit Margin||Average 7%*|
*A loss was recorded due to a large impairment in 2017, net profit margin 2013 – 2016 averaged 7%
Primary Health Care is an Australian multi-disciplinary healthcare company with an expansive network of medical centres, pathology laboratories and diagnostic imaging centres.
Of the three companies assessed Primary stand alone in that they are not a hospital operator. Their business, by comparison, has the lowest debt to assets at 39.98% but also the lowest gross margins, fifteen to eighteen percent lower than HSO and RHC. Primary outlaid $657 Million into fixed and other assets over the past five years, but in 2017 had an impairment expense of $587 million relating to underperforming medical centres. Without the (non-cash) impairment expense annual net profit for 2017 came in at 0.0001%. HSO was also plagued by underperforming medical and pathology centres in 2014/15 and completely divested themselves from Australian Medical Centres.
There is no doubt that demand for healthcare services will continue to increase. Eyes will be on the industry and on policymakers to ensure a stronger future for the medical system as a whole. Reforms to Medicare and private health policy will have an impact in this space. Wage growth in Australia is not keeping up with CPI, and further declines in Private Health Policies are projected. Australian Medical Centres and Pathology labs were not profitable operations over the past few years for Healthsope or Primary Health. The financials indicate that these businesses see consistently low Returns on Total Capital and Returns on Equity. From a business perspective, in my opinion, these businesses do not fit our investment profile. They operate on low net margin with high levels of debt at a time when interest rates are near record lows.
This is general information only and does not constitute financial advice, investment in financial assets can cause losses and should be undertaken at your own risk or after seeking professional advice.
By Chris Liley @ Excellent Investor
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