While the impact of the pandemic on
-Non-urgent surgery likely to be deferred in both
-Debt position considered sound, short-term breaches unlikely to be a concern
-Issues over value in private health insurance in
As the coronavirus outbreak reaches a crisis in
The company has withdrawn FY20 guidance because of the uncertainty. Yet, while the near-term may be affected, one thing is well known. An ageing population means the demand for surgery will continue to grow.
Brokers assume the lower elective volumes are only partly offset by the increased outsourcing from the public sector.
In
With no shortage of patients and amid funding commitments from governments, Ord Minnett remains confident the business can continue to generate a profit, even if this is reduced. Macquarie considers the earnings impact for
The broker continues to believe the business is well-positioned for growth in the longer term via brownfield developments at key sites in
Debt
Elevated debt metrics may be a cause for concern, although Ord Minnett is comfortable sufficient cash can be generated. Much of the debt is held in European joint ventures and is non-recourse to the company.
Based on
Citi upgrades to Buy from Neutral. The broker assesses the debt position of the company is strong and, when the pandemic subsides, the relative value of hospital infrastructure will be enhanced.
Credit Suisse also suspects that there will be a resurgence in elective private hospital volumes as public hospitals will remain constrained even when the impact eases. Despite the stock having more defensive earnings compared with the broader market, the broker notes it has underperformed since the peak in February.
With a more positive outlook, and noting sufficient liquidity and capacity for growth, Credit Suisse raises the rating to Outperform from Neutral. The broker maintains current earnings forecasts, with a view that it remains possible these will be even be supported as elective surgery is brought forward and some government services are moved to the private sector.
However, over a longer timeframe this is hard to predict, although as the crisis is likely to last less than 6-12 months it has little impact on valuation, in the broker's view. A one-off -25% decline in operating earnings forecasts for FY21 would reduce the valuation by just -5%.
Assuming a -10% reduction in global volume for the June and September quarters, and a 25:75 variable fixed cost base, Morgan Stanley reduces FY21 and FY22 estimates for earnings by -21%. While there may be some offset from public-sector volume, the broker suspects this will involve lower tariffs and therefore provide lower margins.
Value Proposition
The assessment of whether the stock is cheap is still difficult, in Morgan Stanley's view. Moreover, long-term issues of Australian margins and the debate about the value of private health insurance will still be there when the virus has passed.
Around 55% of surgeries are conducted in the private sector in
This is particularly the case for surgical procedures. However,
In the event of a prolonged recession, Citi acknowledges the percentage of the population with private health insurance will decline and this could have an impact on the private hospital sector. However, this outcome is not in the broker's base case.
Although Ord Minnett is not calling the bottom of the market, given deep uncertainty, the pressures on hospital affordability are expected to grow amid the disruption to the economy caused by the outbreak.
Yet, even in the event of a precipitous decline in health fund membership, the need for the company's hospitals will not diminish, the broker asserts. Furthermore, the weakness presents an opportunity to build a position the stock and Ord Minnett upgrades to Accumulate from Hold.
FNArena's database has four Buy ratings, two Hold and one Sell (Morgan Stanley). The consensus target is
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