Australia | Feb 16 2012
– Primary Health interim falls short of expectations
– Full year earnings guidance retained, seen as achievable
– Both upgrades and downgrades to broker ratings post the result
By Chris Shaw
Interim earnings for Primary Health Care ((PRY)) fell a little short of market expectations, due in part to higher corporate costs and no insurance proceeds from the Queensland floods yet being received. Net profit came in at around $50 million and was achieved on sales of $686 million, a 4.7% increase relative to the previous corresponding period.
The result was below some estimates of net profit of around $60 million for the half year, Macquarie attributing most of the miss to lower margins in the period. Radiology was the standout performer in the period, while medical centres disappointed in the view of Macquarie.
One positive was full year earnings guidance for a net profit of $120-$125 million has been retained, though this implies an earnings skew of 47.5:52.5 for 1H:2H. UBS sees this as achievable as it would be consistent with FY11 and 2H trading to date is tracking in line with such a split.
With no change in full year guidance, adjustments to earnings estimates across the market have been relatively modest. Deutsche Bank has trimmed its full year earnings per share (EPS) number by 5% and Citi has lowered its number by a similar amount and these are the most significant changes to forecasts. Consensus EPS estimates for Primary Health Care according to the FNArena database now stand at 24.5c this year and 28.3c in FY13.
Changes to earnings estimates contributed to changes in price targets, with the consensus target for Primary Health Care according to the database falling to $3.31 from $3.46 prior to the result. Targets range from Macquarie at $2.80 to Citi at $3.72.
Given a stronger second half is expected, Citi suggests Primary Health Care is setting up for very strong earnings growth in FY13. This reflects an annualising of the improvements expected in the next few months and continued organic market share growth of 5-6%. Helping drive earnings growth should also be lower interest costs, declining capex requirements and improvement in cash flows.
Assuming profits recover as expected next year Citi sees the dividend payout ratio of Primary Health Care also increasing, up to a level of 65% in FY13. This would equate to a dividend next year of 20.5c on the broker's forecasts, which equates to a yield of better than 7.0% at current share price levels.
The combination of such a yield and strong earnings growth should drive a re-rating in the view of Citi, so the broker continues to rate Primary Health Care as a Buy. Credit Suisse agrees, having upgraded to an Outperform rating from Neutral post the interim result.
The upgrade from Credit Suisse reflects a valuation call as much as anything else, as the broker points out despite guidance for the full year being maintained Primary Health Care has underperformed by 17% over the past three months.
RBS agrees the stock offers value and has also upgraded to a Buy rating from Hold previously. The fact full year guidance was reiterated should offer some comfort in the broker's view, while the attractive yield should help limit any downside risks.
Others in the market are not as convinced, BA-ML suggesting while the current valuation for Primary Health Care looks appealing it always does and the current discount to the market and peer group Sonic Healthcare ((SHL)) is justified.
For BA-ML the value in Primary Health Care is simply not attractive enough at current levels, particularly given the need for improved earnings visibility and some greater stability in group earnings.
Macquarie has gone one step further and downgraded Primary Health Care to Underperform from Neutral. Ongoing questions about cash generation as 1H12 was the third successive quarter of overspending and poor return on investment relative to sizable medical centre spending are enough for the broker to see limited upside potential at current levels.
This mixed view of brokers is reflected in the FNArena database, which shows Primary Health Care is rated as Buy five times, Hold twice and Underperform once. The Primary share price today is stronger and as at 11.35am was up 13c or 4.6% at $2.96.
This compares to a trading range over the past year of $2.56 to $3.67 and implies upside of around 12% relative to the consensus price target in the FNArena database.
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