Healthscope Limited (HSP)

By Jason Fittler

HSP is a provider of hospital and related health services to public and private sectors. These sectors are also recession proof; they have had high occupancy rates in their hospital and a strong cash flow.

The business is broken into two parts being Pathology which provides 25% of revenue and Hospitals which provide the other 75% of revenue.

Pathology - This division contains pathology operations in Australia, Malaysia, Singapore and New Zealand, as well as medical centres/skin clinics. Management stated that first quarter 2010 revenue growth has been above market, and that it believes this growth has been from increasing pathology from HSP’s hospitals as well as growth at the expense of one competitor.

Hospital - HSP’s management has identified greenfield and brownfield opportunities for its Hospitals division. In terms of greenfield opportunities, the Norwest Hospital (NSW) is open, and management commented occupancy was running ahead of plan. We assume an incremental earnings contribution from most of these beds in 2010, with the balance contributing from 2011. In terms of brownfield opportunities, management has identified opportunities to increase bed stock and operating theatres by 10% over the next two to three years (ie, increase beds by about 400, and operating theatres by 20).

Better use of operating theatres for Day surgery will be a major component of ongoing growth at the private hospital level. We believe the development of operating theatres in medical/surgical hospitals is a major driver of revenue and margin growth in HSP’s hospitals. This is because of the ongoing shift to day-only surgical cases, which ensure high turnover of a surgical bed.

The day-surgery component of the private-hospital industry has been growing in line with revenue. Surgical technology and anaesthetic advancements have made surgery possible through smaller incisions and provide better pain-relief regimes after surgery. Both have reduced pain after surgery, allowing patients to leave hospital for home earlier.

On a yield of 6.84% and expected growth of 6.9% this is my key pick in the health care sector.

This is for the investor who is looking for long term growth, high yield and a recession proof industry.

PS. For more information on Healthscope Limited (HSP) please call us on 07 4771 4577.