Spire Healthcare Group PLC (LON: SPI) – Private healthcare provider set for rapid growth.

Spire Healthcare Group PLC (LON: SPI) is the United Kingdom-based Hospital Group. It operates around eight clinics and 39 hospitals across England, Wales, and Scotland. It was formed in 2007 with acquisition and rebranding of 25 Bupa hospitals. It also operates centers for sports medicine and physiotherapy. The Company 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 July 2014 and currently it is a constituent of FTSE-All Share index.

SPI works in partnership with around 7,300 experienced Consultants and specializes 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. It’s treatment offerings include Back surgery, Breast enlargement, Cataract removal surgery, Gastric bypass surgery, Hip replacement surgery, knee replacement and Prostate surgery.

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

 (Source: Presentation, Company Website)

Key Fundamental Statistics

Industry Outlook Dynamics

As per the Decision Market 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 include - increasing adoption of private healthcare services, package offerings, discounted prices, fixed consultant fees and partnership with private medical insurance providers.

Moreover, the rise in the waiting list of the NHS for several ailments to choose private healthcare services over NHS services and growing ageing population would also propel the growth in the future.

Growth Prospects and Risk Assessment

The Company 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 Oncology revenue surged by 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. It provides cost-effective services, accurate diagnostic testing and is a leading healthcare provider in every region and community it serves. 

 (Source: Presentation, Company Website)

However, there are certain risk and uncertainties to business growth. The loss of an existing relationship with any of the top four private insurance providers (Bupa, AXA, Aviva and VitalityHealth) can impact the revenue and profit. Moreover, any change in government or NHS policy can affect the business operations significantly. Also, there is a global shortage of allied healthcare practitioners, which can be an impediment for providing adequate clinical quality and can lead to reputational damage. While Covid-19 pandemic is already disrupting the supply chain following the Brexit, its macroeconomic repercussions can cause significant financial risk by having an effect on liquidity and covenants.

Recent Regulatory Updates

• 13 August 2020: SPI agreed terms for the variation of the NHSE Contract. The new agreement will allow phased transition back to normal business. It will be increasing private activity in 35 English hospitals.
• 1 July 2020: Spire Healthcare settled the case with the United Kingdom Competition and Markets Authority and had to pay the fine of £1.2 million.

A Glimpse of Business Segments

The Company bifurcates the business into three services. Further, 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)

Key Shareholders Statistics

H1 FY2020 Trading Update (released on 13 August 2020)

• At the start of the Covid-19 pandemic, the Company, along with other independent companies from the hospital sector, agreed to support NHS England to tackle the pandemic as per the NHSE Contract variation terms.
• The Company to reduce waiting lists will be providing NHS elective care and also will be increasing private activity in 35 hospitals in England.
• NHSE will cover cash costs in accordance with the original contract, while the Company will provide a minimum private rebate and additional incentives on exceeding minimum rebate.
• The Company has been building Private activity from 15 May 2020 and is committed to offering elective care to both private and NHS patients.
• The Company started the year with strong momentum and delivered revenue growth of around 3% in January and February with self-pay growth of 9%.
• Since March, the Company worked for NHS and treated 46,500 NHS admissions in H1 FY2020 (H1 FY2019: 46,800), and all cash costs were covered under the NHSE Contract for the period.
• The Company is expecting to deliver an adjusted EBIT in-between £13 million and £18 million for H1 FY2020 (H1 FY2019: £51.4 million) and adjusted LBT (Loss Before Tax) before impairments ranging from £24 million to £29 million (H1 FY2019: profit before tax of £10 million).
• The capital expenditure stood at around £20 million and net bank debt position of approximately £330 million as on 30 June 2020.
• The Company experienced an increase in bookings and call numbers, indicating a stable return to the private market, along with solid NHS demand.

Financial Ratios: Decent Profitability Margins and Liquidity Position versus the Industry Median

Reported profitability metrics for the financial year 2019 were higher against the industry median, reflecting higher revenue generated and better control over expenses as compared to the industry. On the liquidity front, Spire Healthcare Group Plc’s current ratio was slightly lower than the industry median of 1.03x but had sufficient liquidity to meet short-term obligations. On leverage front, the debt-equity ratio was 1.24x, which was higher as compared to the industry median of 0.96x, reflecting that the company is more leveraged as compared to the industry.  

Share Price Performance Analysis

Daily Chart as on 10 September 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On 10 September 2020 (before the market close, at 8:54 AM GMT+1), Spire Healthcare Group Plc shares were trading at GBX 94.90, down by 2.37% against the previous day closing price. Stock 52-week High was GBX 145.00 and Low of GBX 51.10, respectively.

From the technical standpoint, 200-day RSI (~49 level) is currently supporting the upward movement, which means there is a good potential for a short term rebound in the stock price.

Spire Healthcare Group Plc Vs FTSE-All Share Index (6 months)

(Source: Refinitiv, Thomson Reuters)

In the last six months, Spire Healthcare Group Plc share price has delivered 2.99 per cent return as compared to 0.82 per cent return of FTSE-all share index, which shows that the stock has outperformed the index during the last six months.

Valuation Methodology: Price/Cash Flow Approach (NTM) (Illustrative)

Business Outlook Scenario

SPI is encouraged by the growing calls, bookings, and indications from the insurance partners, which holds the potential for a steady return of the private market. Moreover, the strong NHS demand is likely to ensure the growth in the medium term. The Company has supported the NHS to reduce waiting lists and remains committed to focusing on its private business over the medium term.

The Company has already witnessed an increasing demand from private patients and the outlook for the longer-term appears to be positive with the rising ageing population, increasing requirement of better clinical care, and lengthening NHS waiting list. Furthermore, the Company plans to strive for future opportunities through better digitalisation and the highest standards of quality at all sites. It has also been developing new partnerships and joint ventures with other health providers while deepening relationships with leading health insurers.

 (Source: Company Website) 

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 method, we have given a “Speculative Buy” recommendation on Spire Healthcare Group at the current market price of GBX 94.90 (as on 10 September 2020, before the market close at 8:54 AM GMT+1), with lower-double digit upside potential based on 6.61x Price/NTM Cash Flow (approx.) on FY20E cash flow per share (approx.).

*Dividend Yield may vary as per the stock price movement.

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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