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Healthscope banking on Australia's ageing population

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Key statistics: Healthscope (ASX:HSO)

Closing share price 26-7-16: $3.00

52-week high: $3.05

healthscope

52-week low: $2.12

Most recent dividend: 3.5c

Annual dividend yield: 2.42%

Franking: 0%

Australia's population is ageing, yet the public and private hospital systems are growing at very different speeds.

Public hospital beds grew by 1% each year between 2010 and 2014, compared to 3% annual growth in the private system. Increasing demand for hospital care will flow to operators that are expanding capacity like Healthscope and Ramsay Health Care (ASX:RHC).

Healthscope previously tried to position itself as a healthcare conglomerate.

The group had interests in hospitals, pathology and medical centres, and also tried to enter the aged care market. It was then acquired by private equity in 2010 and re-floated in 2014.

While all floats should be considered with a healthy dose of scepticism, investors may be warier of companies coming out of private equity hands after a number of floats performed particularly poorly in recent years.

Yet Healthscope's hospital division was well run prior to acquisition, and margins have gradually expanded since 2010 to modestly trail Ramsay's today.

Healthscope should predominantly be viewed as a domestic hospital operator, particularly since it won the tender to build and operate the Northern Beaches hospital in Sydney.

The Northern Beaches hospital will have 450 overnight beds, with 40% allocated to private patients and 60% allocated to public patients.

The government will also pay the public share of the capital expenditure to Healthscope as soon as the lights come on, so Healthscope is incentivised to finish the build as soon as possible.

If Healthscope executes this contract successfully it will position the company very well for future tenders based on this public/private model.

Taken together, Healthscope operates local monopolies in a sector with very high barriers to entry. This should support returns over the longer term, particularly if demand for health care continues to outpace supply.

We feel that the market is yet to appreciate Healthscope's quality and growth prospects, which we consider provides material upside for an investment. As such, the domestic Montgomery funds have taken a meaningful position in the company.

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Roger Montgomery is founder, chairman and chief investment officer of Montgomery Investment Management. Following a successful career as an analyst and public company chairman, Roger published the first edition of his stock market guide, Value.able, in 2010, becoming an Australian best seller in just 16 weeks. He holds a Bachelor of Commerce and is a senior fellow of the Financial Institute of Australasia.
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