Australia | Jun 14 2012
– Goldman Sachs adds Primary Health to Conviction List
– Broker sees value at current levels
– Positives should support share price upside
By Chris Shaw
The Goldman Sachs Australia and New Zealand Conviction List represents what the broker sees as its best possibilities for generating return alpha. This is a risk adjusted measure of active investment returns, reflecting a stock's return which is stock-specific beyond that of the index return (the latter being called "beta").
Following a review of the healthcare sector, Goldman Sachs has added Primary Health Care ((PRY)) to its conviction list, seeing attractive value at current levels following recent share price underperformance.
Positives with respect to Primary Health in the view of Goldman Sachs include recent stabilisation of the group's debt levels post successful refinancing, as well as a solid outlook for pathology volumes and the industry structure in general as consolidation continues.
Goldman Sachs also sees doctor churn in Primary's medical centres as manageable in the near-term as many of Primary's doctors are locked up to contracts. The broker does acknowledge on a 2-3 year view there continue to be questions as to whether growth in cash flows for Primary will be limited by ongoing doctor churn, nevertheless.
Looking out to FY13, Goldman Sachs believes there is value in Primary Health at current levels. The broker's earnings per share forecasts suggest outcomes of 24.8c this year and 28.8c in FY13. The latter suggests a price to free cash flow multiple next year of 11.7 times, which is a discount to both the ASX200 ex-Financials and Sonic Health Care ((SHL)), which is Primary's closest peer.
Consensus earnings estimates for Primary Health Care according to the FNArena database stand at 23.2c in FY12 and 27c in FY13.
On a straight earnings multiple basis Primary also looks attractive, as Goldman Sachs's forecasts suggest a P/E for FY13 of 9.8 times. Add in a fully franked yield of close to 4.0% in FY13 and the expectation is a 12-month total return of 20% based on a price target of $3.25.
Goldman's target is in-line with the consensus price target according to the FNArena database of $3.26. Targets range from Macquarie at $2.60 to UBS at $3.65. Ratings range from Five Buy recommendations to two Hold ratings and one Sell.
Macquarie has the Sell rating on Primary, which reflects concerns with respect to ongoing churn in the group's medical centres division. In Macquarie's view this is enough of an issue to limit share price performance.
The Neutral calls of both Credit Suisse and JP Morgan are largely valuation based, while Buy ratings from the likes of Citi reflect an expectation of good earnings growth in FY13 and upside potential relative to price targets.
Shares in Primary Health Care today are unchanged in a weaker overall market, the stock trading at $2.82 as at 10.50am. Over the past year the shares have ranged between $2.56 and $3.57, the current share price implying upside relative to the consensus price target in the FNArena database of around 16%.
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