The healthcare equipment sector is diverse and, following the arrival of Al Noor Hospitals (ANH) and NMC Health (NMC), it's increasingly international. The former joined the London market in June 2013 despite acting as a healthcare provider exclusively in Abu Dhabi. Its reasons for listing are now becoming clear: succession. Last October the company's founder, Dr Kassem Alom, stepped down as chief executive in favour of Ronald Lavater, an American.
NMC Health is a similar business, also headquartered in Abu Dhabi but with hospitals throughout the United Arab Emirates. Healthcare reforms in Dubai are playing into NMC's hands: the city's decision to roll out mandatory health insurance will inevitably boost patient numbers. But investing in these fast-growing Middle Eastern businesses is expensive. Both stocks trade on roughly 22 times forward earnings, which leaves their growth prospects largely priced in for now.
Smith & Nephew (SN.) was often cited as a takeover target last year: analysts suspected the med-tech giant might catch the attention of US companies seeking to reduce their tax bill through a foreign merger. Towards the end of 2014, the US government passed new legislation to make tax-driven deals more difficult, but that shouldn't detract from what remains a quality business. Sales across China, India, South Africa and the Middle East rose 17 per cent in the second quarter, while the US division outperformed established European markets with 4 per cent sales growth. The US performance was boosted by the £1bn acquisition of medical technology company Arthrocare in May, but chief executive Olivier Bohuon has ruled out a tax-driven tie-up.
One company that did choose to sell out was Synergy Health (SYR). Analysts at N+1 Singer said the agreed takeover by Steris (US:STE) "brings the curtain down on one of the most successful UK investment stories of the last decade". Having floated on London's junior market in July 2001 with a market capitalisation of £21m, the company was eventually bought for 1,950p a share - £1.2bn in total. That amounts to a compound annual return of 22 per cent for investors since the IPO.
Another stock to have found real momentum is medical wholesaler UDG Healthcare (UDG). In November the group reported a 9 per cent increase in operating profits to £82m for the year to September, prompting chief executive Liam Fitzgerald to call the company's "year of transformation" complete.
| Name | Price (p) | Market value (£m) | PE ratio | Dividend yield (%) | 1-year performance (%) | Last IC view |
| Al Noor Hospitals | 910 | 1,063 | 22.0 | 1.4 | 7.8 | Hold, 995p, 9 October 2014 |
| NMC Health | 475 | 882 | 1996.3 | 0.9 | -2.7 | Hold, 476p, 20 August 2014 |
| Smith & Nephew | 1,190 | 10,638 | 34.1 | 1.4 | 35.0 | Hold, 1,040p, 4 August 2014 |
| Spire Healthcare | 327 | 1,312 | NA | 0.0 | NA | Hold, 246p, 1 September 2014 |
| Synergy Health | 2,080 | 1,228 | 28.3 | 0.7 | 61.2 | Hold, 1,303p, 4 June 2014 |
| UDG Healthcare | 390 | 951 | 17.2 | 2.1 | 10.0 | Hold, 337p, 21 November 2014 |
Favourites
This sector is full of quality businesses, which can make the ratings seem punchy. Stocks we're keen on include UDG Healthcare, even though the shares took off towards the end of 2014. UDG has boosted growth and carved out a niche position in the healthcare sector.
Outsiders
Shares in Spire Healthcare (SPI) have done well since the hospital operator joined the London market in July 2014, bolstered by double-digit sales growth in the first six months of the year. But this month's news that Circle Holdings (CIRC), which also manages hospitals, will terminate its Hinchingbrooke contract is worrying. Spire shares trade on just 10 times forward earnings, but this rating might reflect the financial risk associated with taking on hospital contracts.
