Spire

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From Shares Magazine

Alarm bells are ringing at independent hospital group Spire Healthcare (SPI) following a decline in NHS referrals which has hit anticipated underlying sales and earnings growth.

Nearly a fifth of the company’s market value has been wiped off since its profit warning on 14 September.

The company runs 38 private hospitals and 13 clinics. Users of its facilities include those who are privately insured, self pay patients and NHS referred patients.

What's gone wrong?

There has been a clampdown on NHS doctors referring patients for treatment as elective care demand is greater than hospitals are able to treat.

Spire expects earnings before interest, tax, depreciation and amortisation (EBITDA) to be up to 0.7% lower than its previous guidance of 16.8%. Sales are expected to be flat in the second half of 2017.

Underlying sales were down 0.1% in the two months to 31 August 2017, marking a significant reduction from 3.8% underlying sales growth in the first half of 2017.

NHS revenues declined 5.1% over the same period, down from 5.9% growth in the six months to 30 June as the health service introduced measures to reduce elective referrals.

What the analysts think

Berenberg’s Charles Weston has downgraded his recommendation from ‘buy’ to ‘hold’ and reduced the target price to 300p on the lowered guidance and increased uncertainty into 2018. Spire presently trades at 250.8p.

He says the new earnings guidance implies EBITDA will contract by 5% and overall earnings will fall by 7%.

Liberum’s Graham Doyle says you shouldn’t buy the shares on price weakness. He flags the risk that NHS referrals could get worse while private medical insurance ‘appears to be facing greater challenges’.

Spire says the amount of work it conducted funded by private medical insurance fell 0.6% to £219.3m in the six months to 30 June.

Doyle at Liberum warns that fewer people are taking out health insurance, intensifying the funding pressure on hospital operators like Spire. ‘For Spire this is a big problem given private medical insurance is 50% of group revenue,’ he adds.

Numis analyst Sally Taylor has cut sales forecasts by 2% for 2017 to 2019 and slashed anticipated EBITDA by 5% to 7%.

Taylor says the uncertainty looms over whether changes in the NHS referral process will affect the amount of patients referred to the independent sector and if there will be a shift to higher tariff procedures.

‘In the medium term, this is likely to benefit Spire’s self-pay opportunity, in our view,’ comments the analyst.

While a 14% increase in self-pay sales were among the bright spots in Spire’s results, the division only represents one fifth of overall revenue.
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