Australia | Aug 12 2009
By Chris Shaw
One key for Primary Health Care ((PRY)) in its acquisition of Symbion was the ability to deliver on the synergies it identified in the deal and the group’s full year profit result shows management is doing just that, meaning earnings of $110.8m were viewed as a solid result by the market.
As well as meeting expectations with respect to Symbion, the company also lifted margins in each of its divisions, points out Southern Cross Equities, while Primary also managed to add 48 doctors to its books over the course of the year.
Another initiative was to introduce co-payments at a number of its centres, a move the broker expects will be expanded in coming years as to date the results of the change have been positive. The change should help offset cuts to pathology prices in Medicare. According to RBS Australia this suggests possible earnings upside if volumes can be retained.
Another good element of the result, according to Southern Cross Equities, was the margin improvement in the imaging division, as this division has performed relatively poorly in recent years. However, RBS Australia cautions of a likely increase in independent diagnostic imaging businesses going forward, which it suggests could put pressure on margins in the division given the high fixed cost nature of the business.
Post the result, stockbrokers have made some changes to earnings forecasts, with Bank of America Merrill Lynch lifting its earnings per share (EPS) numbers by 2.5% in FY10 and 1.5% in FY11 and Macquarie increasing its estimates by 5.2% and 3.0% respectively.
Southern Cross Equities went the other way and cut around 10% from its FY10 EPS forecast and 4% from its FY11 numbers, putting its revised numbers at 42.8c and 47.9c respectively. In contrast, Bank of America Merrill Lynch is at 43.7c and 50c respectively, RBS Australia is at 41.3c and 43.4c and consensus forecasts according to the FNArena database stand at 42.3c and 47.9c.
With the company not offering earnings guidance for FY10, equity brokers have searched for possible sources of upside to their numbers, one being a resolution with respect to the $1.54 billion in debt due to be refinanced next February. UBS sees any deal on this issue as a potential catalyst for the shares as it would remove some uncertainty, while a continuation of the group’s ability to deliver on synergies and the additional confidence this should give to FY10 earnings should also be well received by the market in its view.
This supports the broker’s Buy rating, one matched by RBS Australia and Credit Suisse, the latter taking the view the group’s plan to rollout additional medical centres in coming years will support an already solid earnings growth outlook.
GSJB Were in contrast argues the market is already pricing in synergy benefits from the Symbion acquisition and so it suggests the stock is no better than a Hold at current levels given the share price implies a price to earnings multiple of around 13.6x in FY10.
This leaves the broker as one of the odd ones out as the FNArena database shows a total of seven Buy ratings and just three Holds, with an average price target of $6.22, up from $6.08 prior to the result. Shares in Primary Health today are stronger and as at 11.40am the stock was up 15c at $5.73. Over the past year the stock has traded in a range of $3.46 to $5.85.
Southern Cross Equities is not part of the FNArena stockbroker universe. The broker rates Primary as Buy with a price target of $6.50.