Business Overview
Spire Healthcare Group Plc (LON: SPI) is an independent hospital company. The group has 39 private hospitals, and 8 clinics across Wales, Scotland, and England. The company delivered tailored, personalised care to around 260 thousand in-patients and daycase patients during 2018, and is the leading private provider, by volume, of the knee and hip operations in the UK. The company specialises in Bones and Joints, Cosmetic surgery, Eye surgery and treatments, Heart treatments, Men’s Health, Urology, Weight loss and Women’s Health. The company also offer a variety of tests and scans, which include Cardiac CT scan, CT scan, MRI scan, Ultrasound and X-ray. The company’s treatment offerings include Back surgery, Breast enlargement, Cataract removal surgery, Gastric bypass surgery, Hip replacement surgery, knee replacement and Prostate surgery. The company also provides finance options for its patients through inspire health insurance and treatment loans. The company has its hospitals all across the UK, and prime locations are Wales, South West, Scotland, North West, North East, Yorkshire, Midlands, London and East of England.

The current Non-Executive Chairman is Garry Watts and joined the group in the year 2011. Justin Ash holds the responsibilities of the Chief Executive Officer and joined the group in 2017. Jitesh Sodha is the current Chief Financial Officer.

Key Statistics




Top Shareholders

 

Trading Update (Full-year ending 31^st December 2019)

On 16th January 2020, Spire Healthcare Group released an update for full-year trading period ending 31st December 2019. Driven by the strong sales growth momentum, the company made decent progress in the financial year 2019. The company’s private revenues had shown decent growth, and adjusted EBITDA (pre-IFRS 16) is expected to be in line with the market and management’s expectations. The company continue to make an investment in patient safety, and clinical quality, which boosted the company’s performance and 83 per cent of Company's sites are rated Outstanding or Good by the Care Quality Commission (CQC) or equivalent versus 81 per cent in H1 FY2019 and 76 per cent in the financial year 2018. The company continue to make progress in cash generation in the second half of the financial year 2019. The expected net bank debt position in FY2019 is around GBP 330 million versus GBP 362.2 million in H1 FY2019 and GBP 372.7 million in the financial year 2018. The company expects its capex to be in line with the set guidelines of GBP 60 million (approximately).

The company will release its Preliminary Results on 5th March 2020 for the financial year ending 31st December 2019.

Financial Highlights - H1 Financial Year 2019 (30th June 2019, £, million)

(Source: Interim Results, Company Website)

In the first half of the financial year 2019, the company’s revenue increased by 3.4 per cent to GBP 491.6 million versus GBP 475.6 million in H1 FY2018, due to an increase in all the three players group, i.e. PMI sales surged by 5.1 per cent, Self-pay sales rose by 1.4 per cent, and NHS sales was up by 2.5 per cent. The EBITDA (post-IFRS 16) declined by 2.1 per cent to GBP 96.8 million in H1 FY2019 against an EBITDA (post-IFRS 16) of GBP 98.9 million in H1 FY2018.The EBITDA (pre-IFRS 16) declined by 3.6 per cent to GBP 63.7 million in H1 FY2019 against an EBITDA (pre IFRS 16) of GBP 66.1 million in H1 FY2018.The Operating profit before exceptional items (post-IFRS 16) declined by 2.1 per cent to GBP 51.4 million in H1 FY2019 as compared to GBP 52.5 million in H1 FY2018. The reported Operating profit (post-IFRS 16) surged by 37.1 per cent to GBP 51 million in H1 FY2019 from GBP 37.2 million in H1 FY2018. The reported Operating profit (pre-IFRS 16) surged by 85.9 per cent to GBP 30.3 million in H1 FY2019 from GBP 16.3 million in H1 FY2018. The company’s PBT (Profit before tax) post-IFRS 16 stood at GBP 9.6 million in H1 FY2019 versus an LBT (loss before tax) of GBP 2.2 million in H1 FY2018. The company’s PBT (Profit before tax) pre-IFRS 16 surged by 227.5 per cent to GBP 16.7 million in H1 FY2019 from a PBT (Profit before tax) of GBP 5.1 million in H1 FY2018. The company’s PAT (Profit after tax) post-IFRS 16 surged by 238.1 per cent to GBP 7.1 million in H1 FY2019 from a PAT (Profit after tax) of GBP 2.1 million in H1 FY2018. The company’s PAT (Profit after tax) pre-IFRS 16 surged by 65.9 per cent to GBP 13.6 million in H1 FY2019 from a PAT (Profit after tax) of GBP 8.2 million in H1 FY2018. Basic earnings per share, post-IFRS 16, increased by 260 per cent to 1.8 pence in H1 FY2019 against the 0.5 pence in H1 FY2018. Basic earnings per share, pre IFRS 16, increased by 70 per cent to 3.4 pence in H1 FY2019 from 2 pence in H1 FY2018. Capital investment also decreased by 41.2 per cent to £19.7 million in the first half of 2019. Net bank debt lowered with covenant leverage at 3.3 times EBITDA versus the limit of 4 times.

Revenue growth in all three payor groups


(Source: Company Website)
 
In the first half of the financial year 2019, the revenue from all the payor groups (customers) have increased, which includes NHS, Self-pay, PMI and Other. The revenue from PMI increased by 5.1 per cent from GBP 234.9 million in H1 FY2018 to GBP 247 million in H1 FY2019. The Self-pay revenue surged by 1.4 per cent to GBP 88.6 million in H1 FY2019 from GBP 87.4 million in H1 FY2018. The revenue from NHS increased by 2.5 per cent to GBP 143.7 million in H1 FY2019 from GBP 140.3 million in H1 FY2018. The PMI and Self-pay together constitute the private revenue of the company, which has increased by 4.1 per cent versus H1 FY2018 data.

Key Performance Indicators



Unplanned returns and readmissions

The company’s unplanned returns per 100 visits have declined slightly to 0.11 in FY2018 from 0.12 in the financial year 2017. The unplanned readmissions per 100 discharges increased slightly but remained in the lower side to 0.21 in FY2018 from 0.18 in FY2017. The low level of unplanned returns and readmissions reflect a strong record of treatment effectiveness of the company.



Clostridium difficile infection rate

Although the company’s Clostridium difficile infection rate has increased slightly to 0.14 in the financial year 2018 from 0.13 in FY2017, the company still manage to keep the rate on the lower side for the period. 



Self-Pay revenue growth

Self-pay revenue increased by 8.7 per cent to GBP 174.1 million in FY2018 from GBP 160.2 million in FY2017. The Self-Pay revenue growth helped the company to mitigate NHS revenue pressure in H2 FY2018.


Patient Satisfaction

In the financial year 2018, the satisfaction level of patients slightly declined to 96 per cent versus 98 per cent in FY2017. Despite the decline, the patient satisfaction remained on the higher side as per industry standards.

Financial Ratios
 
 

The reported gross margin in H1 Financial Year 2019 declined by 0.2 per cent to 46.9 per cent against 47.1 per cent reported last year for the same period, while remained lower than the industry median of 51.2 per cent. The reported EBITDA margin of 19.7 per cent for the H1 Financial Year 2019 stood lower than the industry median of 20.5 per cent. The reported operating margin in the first half of the Financial Year 2019 increased by 2.6 per cent to 10.4 per cent from an operating margin of 7.8 per cent reported last year for the same period. The reported Pretax margin stood at 2 per cent for the H1 Financial year 2019 versus a negative Pretax margin of 0.5 per cent reported last year for the same period and stood lower than the industry median of 6.2 per cent. Net margin reported was 1.4 per cent for the H1 of the financial year 2019, reflecting an increase of 1 per cent when comparedwith last year data for the same period. Return on equity for the H1 of the Financial year 2019 stood at 0.7 per cent versus a return on equity of 0.2 per cent in the last year for the same period. On the liquidity front, Spire Healthcare GroupPlc’scurrent ratio of 1.07 was slightly higher than the industry median of 1.06, reflecting sufficient current assets to pay its short-term obligations. On leverage front, the debt-equity ratio of the Spire Healthcare GroupPlc’swas 1.20x, which was higher as compared to the industry median of 1.05x, reflecting that the company is more leveraged as compared to its peers.
 
Share Price Performance
 

Daily Chart as of February 13^th, 2020, before the market close (Source: Thomson Reuters)

Spire Healthcare GroupPlc shares were trading at GBX 130.80 at the time of writing before the market close (at 11:34 AM GMT) on 13^th February 2020 and were up by 1.79% versus the previous day closing price. Stock's 52 weeks High is GBX 145.00 and Low is GBX 95.25. Stock’s average traded volume for 5 days was 770,471.60; 30 days – 804,125.67 and 90 days – 697,139.47. The traded volume (average) for 5 days was down by 4.19 per cent versus 30 days average traded volume. The group’s stock is reflecting significantly higher volatility as against the benchmark index based on the company’s beta of 1.59. The shares of the company have delivered a positive return of 7.30 per cent in the last nine months. The company’s stock has given investors 32.52 per cent of a positive return in the last six months.The outstanding market capitalisation was around £515.03 million, with a dividend yield of 2.96%.

Valuation Methodology

Method 1: Price to Earnings Approach (NTM)



To compare Spire Healthcare GroupPlc withits peers, Price/Earnings multiple has been used. The peers are Abcam Plc (NTM Price/Earnings was 42.23), CVS Group Plc (NTM Price/Earnings was 21.68), Hikma Pharmaceuticals Plc (NTM Price/Earnings was 16.08), Mediclinic International Plc (NTM Price/Earnings was 13.79) and Caretech Holdings Plc (NTM Price/Earnings was 11.06). The average of Price/Earnings (NTM) of the company’s peers was 21.00x (approx.)

Method 2: Price to Cash Flow Approach (NTM)
 
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To compare Spire Healthcare GroupPlc with its peers, Price/Cash Flow multiple has been used. The peers are UDG Healthcare Plc (NTM Price/Cash Flow was 15.48), Aspen Pharmacare Holdings Ltd (NTM Price/Cash Flow was 7.34), Mediclinic International Plc (NTM Price/Cash Flow was 6.66), MD Medical Group Investments Plc (NTM Price/Cash Flow was 5.48) and NMC Health Plc (NTM Price/Cash Flow was 3.55). The Average of Price/Cash Flow (NTM) of the company’s peers was 7.70x (approx.)

Growth and Risk Assessments

The company keeps on launching new platforms and upgrade the old products and services to become one of the market leaders in the healthcare market. There has been a strong demand for its existing as well as newly launched products in the market. The company provides cost-effective services, accurate diagnostic testing and is a leading healthcare provider in every region and community it serves. The group is exposed to the effects of political and economic risks, including the impact of Brexit, as the market expects macro-economic uncertainty or downturn in the UK economy as a result of Brexit. The company’s revenue is impacted by increased competition in the healthcare sector.

Conclusion

Credit risk is the most material risk faced by the company, as it is exposed to the risk of loss due to the inability of a customer or counterparty to meet its obligations. The company has undertaken extensive activity to identify and mitigate its exposure to plausible risks which may arise from Brexit.

For the full year 2019, the company made decent progress, particularly in private revenues, driven by strong sales growth momentum. In H1 FY2019, the company had a robust performance with clear signs of the operational and strategic initiatives bearing fruit. 

The group saw growth in both self-pay and private insurance, with a mainly robust result in private insurance, reflecting increasing customer awareness following the marketing campaigns. In the current period, NHS revenue also outperformed expectations as the company worked in close partnership with the CCGs (Clinical Commissioning Groups).

The company has 83 per cent of sites rated outstanding, excellent, or the equivalent. The company is delighted that both the new hospitals in Nottingham and Manchester have been rated as an outstanding and have the highest number of outstanding sites of any independent provider. 

Over the course of 4 years (FY14 - FY18), the company’s revenue surged from GBP 856 million in FY14 to GBP 931.1 million in FY18. Compounded annual growth rate (CAGR) stood at 2.12 per cent.

Based on the decent prospects and supported by valuation done using the above method, we have given a "SPECULATIVE BUY" recommendation at the closing price of GBX 128.50 (as on 12^th February 2020) with single-digit upside potential, based on 21.00x NTM Price/Earnings (approx.) on FY20E earnings per share (approx.) and 7.70x NTM Price/Cash Flow (approx.) on FY20E cash flow per share (approx.).
 
*All forecasted figures and peers have been taken from Thomson Reuters.
*The “Speculative Buy” recommendation is also valid for the current price as covered in the report (as on 13^th February 2020).

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