Australia | Nov 29 2017
Healthscope has provided more clarity regarding the new Northern Beaches Hospital in Sydney, although brokers remain wary of the longer term targets.
-Northern Beaches Hospital on time and on budget but can long-term margins be met?
-Uncertainty regarding private patient conversion
-Strong expressions of interest, supported by doctors who currently travel out of the catchment
By Eva Brocklehurst
Concerns over profitability of Sydney's new Northern Beaches Hospital were not completely allayed by the latest briefing on the project from Healthscope ((HSO)). Financial targets for the hospital were reiterated, with revenue from both public and private services to exceed $300m per annum in 3-4 years after the opening. Margins are expected to be similar to the current hospital portfolio, at around 18%.
Macquarie is cool on the outlook for the stock as a whole, given the uncertainty regarding underperforming sites in Victoria and elevated gearing. The broker acknowledges management appears confident regarding the underlying business case for the NBH but, given the nature of the project as well as limited financial detail, plays it safe with forecasts.
The company has clarified the steps required to obtain the state's capital repayment of $425m. These include technical completion, expected mid 2018, a private hospital licence, transfer of patients and the independent review process. Healthscope is targeting the capital repayment by the end of 2018. The project is progressing on time and on budget and there is a low risk of this payment being delayed.
Credit Suisse suspects the company will struggle to reach its returns target. The broker forecasts a return on investment through the life of the project below the targeted 15%, ramping up to just around 10% in FY25, and reaching a maximum of 14.5% in FY38.
To achieve the 15% target in FY22 requires a blended earnings (EBITDA) margin of 20%, above the company's current Australian hospital margin of 17.5%, in the broker's opinion.
Considering the company is yet to establish a track record of successfully managing a large public facility within a broader public/private participation, Credit Suisse envisages greater downside risk to base case earnings versus any upside surprise.
UBS is more positive about the stock, although remains conservative about the performance of the NBH in the ramping up phase. Yet the broker envisages clear upside risk to estimates if the company can meet/exceed revenue and profitability targets by FY22.
NBH carries a low structural risk given the demographics, although UBS acknowledges, from an operating perspective, there is significant conjecture about the private patient conversion and the utilisation of the private side. Expressions of interest for consulting suites/theatre time have been strong and underwritten by doctors at both Manly and Mona Vale, who currently travel out of the catchment to conduct their private consultations.
NBH Outlook
Public patients are expected to account for around 60% of capacity and will be sourced from Manly Public Hospital, which is closing, and Mona Vale Public, which will provide sub-acute services. Patients will be admitted as either public or private. The public lease is for 20 years while the private lease is for 40 years, at which time the private side will be handed back to the state. Total project cost is expected to be around $840m, to be fully funded by Healthscope.
The NSW government will make a capital payment for the public component and a portion of the shared facilities once the transfer of patients from existing hospitals is completed. This payment is estimated at $435m. Total annual project revenue is expected to exceed $300m after patient volumes have achieved the full ramp-up. The NSW government will make a monthly payment to Healthscope during the 20-year operating term.
Private volumes are expected to be supported by the demand for elective surgery, as around 80% of privately insured patients are likely to undertake elective surgery outside the catchment area. This will also include private patients currently treated at Manly and Mona Vale.
Ord Minnett is comfortable with the project at most levels. The broker also notes a solid first quarter for Healthscope, featuring revenue growth above industry growth rates. Cost efficiencies are at an early stage, so the broker looks for clarification of the savings targets at the full year result.
Ord Minnett also points out that Victorian and Tasmanian earnings fell around -9% in FY17 because of challenges at sites in Victoria and there was no update on these sites at the briefing.
Morgan Stanley sticks by its cautious view but suggests the near-term downside for Healthscope is limited. Given the geographic constraints the broker is confident the NBH public section will ramp to schedule. The ramping up of private is not so obvious, as 80% of patients are being referred out of the catchment currently. While it may seem that convenience will drive the ramp-up, the key determinant will be the ability to recruit and retain medical specialists.
The broker is comfortable with the balance sheet yet, without the full financial details, NBH presents some risk to the gearing covenant, albeit the margin of error is small. All up, low growth prospects in the near-term have been captured by the stock's performance and Morgan Stanley maintains an Equal-weight rating.
FNArena's database shows two Buy ratings, for Hold and one Sell (Credit Suisse). The consensus target is $2.10, signalling 8.4% upside to the last share price. Targets range from $1.80 (Morgan Stanley) to $2.72 (UBS).
This stock is not covered in-house by Ord Minnett. Instead, the broker whitelabels research by JP Morgan.
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