Spire Healthcare Group PLC (LON: SPI) – Expecting a boom in future demand, while it is serving NHS with flexibility arranged through the covenant waiving.

The United Kingdom-based Spire Healthcare Group PLC is a Hospital Group. It operates around eight clinics and 39 hospitals across England, Wales, and Scotland. The Company was formed in 2007 with acquisition and rebranding of 25 Bupa hospitals. It also operates centres for sports medicine, and physiotherapy. The Group holds the position of leading private provider of hip and knee operations, in terms of volume. It has a workforce of over 13,300 employees and more than 7,300 consultant surgeons and clinical specialists. The Company was admitted to the LSE (London Stock Exchange) on 23^rd July 2014 and current a constituent of FTSE-All Share index.

SPI works in partnership with around 7,300 experienced Consultants and 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 offers 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.

On 17^th September 2020, the Company is expected to announce its half-yearly results for FY2020.

 
(Source: Annual Report, Company Website)

Key Fundamental Statistics



Segments at a Glance


The Group bifurcates its business into the following three services:
 

1. Orthopedics, high acuity services

2. Gynecology, plastic surgery, urology

3. Others
 

The revenue is generated from major sources – Self Pay, NHS and PMI, which contributed 18.7 per cent, 29.9 per cent and 51.4 per cent of revenue in the financial years 2019.



(Source: Annual Report, Company Website)

Milestones in Non-Financial KPIs Against the Strategic Priorities
 

1. In 2019, 96 per cent of patients showed satisfaction, while the Group served 81,000 patients.

2.  CQC Rating stood at 85 per cent in 2019 as against 79 per cent in FY2018.
 

(Source: Annual Report, Company Website)

Recent Developments – Focusing Resources to Combat the COVID-19 Disruption

14^th May 2020: The Group stated in its annual general statement that the period of elective suspension due to COVID-19 crisis had created the future demand and lengthening of waiting lists. Notwithstanding, the Board was unable to provide the market guidance for FY20.

9^th April 2020: Post signing agreement with NHS in Wales (6th April 2020) and England (21^st March 2020), the Group has further contracted with NHS Scotland to serve Covid-19 patients in its Murray field Hospital in Edinburgh.

1^st April 2020: The Group received the covenant waiver from the lenders of its Senior Facility, which ensured flexibility to its contract with NHS.

Top Shareholders Statistics

 
AGM Statement and Agreement with NHS (National Health Service)

On 14th May 2020, Spire Healthcare Group released a statement for annual general meeting and agreement with NHS. As per the agreement, the group’s facilities will be used by NHS in Scotland, Wales and England as extra capacity for critical and urgent medical treatments related to coronavirus outbreak. The Company is also entitled to cash cost recovery by NHS for services provided, and the contract will last till 28th June 2020, with a notice period of one month before the contract end. To provide further flexibility, SPI lenders have agreed to waive two covenant tests on 30th June 2020 and 31st December 2020. The Board expects agreements with lenders, and NHS will bring financial stability with sufficient liquidity, which will help the company to return to normal operations. At present, the group is not able to quantify the impact of uncertainty and will not be able to provide any future guidance for FY2020. The Care Quality Commission has upgraded the Spire Hartswood rating to Good, which shows an increased focus on patient safety and clinical quality. The groups’ management team will be taking a salary cut of 20 per cent for the next three months.

Financial Highlights – Strong Revenue Generation in FY2019 (31^st December 2019)


(Source: Annual Report, Company Website)
 
For the financial year 2019, the Company’s revenue increased by 5.3 per cent to GBP 980.8 million as compared with GBP 931.1 million in FY2018. This increase was driven by private growth of 5.8 per cent for the period. PMI revenues increased by 7 per cent, Self-pay surged by 2.7 per cent, and NHS rose by 5.0 per cent. The gross profit stood at GBP 451.4 million in the financial year 2019 versus GBP 433.5 million in FY2018.

The reported operating profit increased by 32.8 per cent to GBP 94.4 million in FY2019 against GBP 71.1 million in FY2018. The reported PBT (profit before tax) stood at GBP 9.6 million in the financial year 2019 versus an LBT (loss before tax) of GBP 5.6 million in FY2018. The Profit for the year stood at GBP 7.2 million in FY2019 versus GBP 0.1 million in FY2018. The adjusted earnings per share stood at 2.4 pence in FY19. Net bank debt lowered, with covenant leverage at 3.0x EBITDA. The Board has approved a final dividend per share of 2.5 pence, which represents a total dividend per share of 3.8 pence.

Financial Ratios: Strong Profitability versus Industry Median

 
 

The reported Gross Margin, EBITDA Margin and operating margin stood at 46.00 per cent, 19.1 per cent and 9.5 per cent, respectively, for the financial year 2019. Reported profitability metrics were higher against the industry median. On the liquidity front, Spire Healthcare Group Plc’s current ratio was slightly higher against the last year data. On leverage front, the Debt-equity ratio of the Spire Healthcare Group Plc’s was 1.24x, which was higher as compared to the industry median of 0.95x.

Share Price Performance Analysis


Daily Chart as on 4^th June 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On 4^th June 2020, at the time of writing (before the market close, at 9:35 AM GMT+1), Spire Healthcare GroupPlc shares were trading at GBX 95.70, down by 1.74% against the previous day closing price. Stock's 52 weeks High and Low are GBX 145.00/GBX 51.10.

Bullish Technical Indicators

From the technical standpoint, its shares were trading well above its short-term support level of 20-day simple moving average prices, which reflects an uptrend in the stock and carrying the potential to move up further.

Valuation Methodology

Method 1: Price to Earnings Approach (NTM)

 

To compare Spire Healthcare Group Plcwith its peers, Price/Earnings multiple has been used. The peers are Abcam Plc (NTM Price/Earnings was 50.31), Straumann Holding AG (NTM Price/Earnings was 42.15), Dechra Pharmaceuticals Plc(NTM Price/Earnings was 25.33), ConvaTec Group Plc(NTM Price/Earnings was 21.10) and Hikma Pharmaceuticals Plc(NTM Price/Earnings was 18.73). The Average of Price/Earnings (NTM) of the company’s peers was 31.50x (approx.).

Method 2: Enterprise Value to Sales Approach (NTM) 
 
 

To compare Spire Healthcare Group Plcwith its peers, EV/Sales multiple has been used. The peers are CVS Group Plc (NTM EV/Sales was 1.48), Georgia Healthcare Group Plc (NTM EV/Sales was 0.88), Servizi Italia SpA (NTM EV/Sales was 0.87), Medios AG (NTM EV/Sales was 0.76) and Uniphar Group Plc (NTM EV/Sales was 0.34). The Median of EV/Sales (NTM) of the company’s peers was 0.87x (approx.).

Valuation Metrics

                                                                                              
(Source: London Stock Exchange)

As on 30^th April 2020, EV to EBITDA multiple of the Spire Healthcare Group Plc was around 7.8x, which was lower as compared to the industry. It reflects, shares are undervalued against its peers. 

Dividend Yield


(Source: Refinitiv, Thomson Reuters)

Spire Healthcare Group Plc has a dividend yield of 1.33 per cent, which is higher than the industry dividend yield of 1.17 per cent and the sector dividend yield of 1.07 per cent.

Industry Outlook Dynamics

As per the Market Grow Insight’s report, the UK private healthcare was valued around USD 11.8 billion in 2018, and the market size is projected to reach around USD 13.8 billion by 2025, growing with a compounding annual growth rate of 2.6 per cent. The growth drivers for the industry includes - increasing adoption of private healthcare services, package offerings, discounted prices, fixed consultant fees and partnership with private medical insurance providers.

Growth Prospects and Risk Assessment
 

The Group has been providing comprehensive services on patient safety, while progressively generating revenue, profitability, and cash flow over the years. The landmark partnership with NHS across Scotland, Wales and England reflects the strength of its portfolio and services. It has a well-invested and geographically diverse profile with 39 private hospitals and eight clinics. In 2019, the Group’s Oncology revenue surged 16 per cent, which holds significant potential for profitable expansion. 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. 

However, the performance of the Group is subject to several types of risk such as increasing risk with Brexit impact, challenges imposed by competitors, cybersecurity and the potential impact of the COVID-19 over the trade. The Group is exposed to the effects of political and economic risks, as the market expects macro-economic uncertainty or downturn in the UK economy.

Business Outlook Scenario

The financial year 2020 is progressing in-line with the Board’s anticipations, while coronavirus (COVID-19) is creating uncertainty. At present, the Group is unable to predict the potential impact of the coronavirus. The Company is actively managing the situation on a daily basis and following Public Health England guidelines. For the full year 2019, the Company made decent progress, particularly in private revenues, driven by strong sales growth momentum. 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. SPI expects agreements with lenders, and NHS will bring financial stability with sufficient liquidity, which will help the company to return to normal operations. 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.


 (Source: Annual Report)

Over the course of 3 years (FY16 - FY19), the Company’s revenue surged from GBP 926.40 million in FY16 to GBP 980.80 million in FY19. Compounded annual growth rate (CAGR) stood at 1.92 per cent.

Based on the decent growth prospects and support from the valuation as done using the above two methods, we have given a “Speculative Buy” recommendation at the current market price of GBX 93.80 (as on 4^th June 2020, before the market close at 12:02 PM GMT+1), with lower-double digit upside potential based on 31.50x NTM Price/Earnings (approx.) on FY20E earnings per share (approx.) and 0.87x EV/Sales (approx.) on FY20E sales (approx.).
 
*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

Disclaimer

PLEASE BE ADVISED THAT YOUR CONTINUED USE OF THIS SITE OR THE INFORMATION PROVIDED HEREIN SHALL INDICATE YOUR CONSENT AND AGREEMENT TO THESE TERMS.
References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.
This website is a service of Kalkine Limited. Kalkine Limited is a private limited company, incorporated in England and Wales with registration number 07903332.
The article has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. Kalkine is not responsible for material posted on this website and does not guarantee the content, accuracy, or use of the content in this site. No advice or information, whether oral or written, obtained by you from Kalkine or through or from the service shall create any warranty not expressly stated.
Kalkine do not offer financial advice based upon your personal financial situation or goals, and we shall NOT be held liable for any investment or trading losses you may incur by using the opinions expressed in our publications, market updates, news alerts and corporate profiles. Kalkine does not in any way endorse or recommend individuals, products or services that may be discussed on this site. You should discuss your portfolios and the risk tolerance level appropriate for your personal financial situation, with a professional licensed financial planner and adviser.