Synergy found lacking

Management at healthcare outsourcing specialist Synergy Health (SYR) must find yet another reason for missing targets after the company warned of weak organic revenue growth in the first half. Last year, it was the low value of the euro and tough price competition in the Dutch linen business. This time it looks like more of the same, with the added surprise that contracts in the US are taking longer to sign than expected - the news forced the share price to its lowest in seven months.

Revenue growth will be toward the lower end of expectations, in spite of a series of expensive acquisitions designed to broaden the base of the business, after low levels of organic growth continued into the first half. True, solid margins have kept earnings growth on course, and there's been "good progress with outsourcing opportunities that will have a material impact on organic growth in the near future". However, Synergy has gone to considerable lengths and expense to gain a foothold in the US, but with no tangible improvement in underlying performance. And Swiss acquisition Leoni Studer is yet to make a difference in Europe, where austerity measures have had the biggest impact on healthcare budgets. Synergy will publish half-year results on 12 November.

Numis Securities says...

Buy. Synergy's exposure to governmental buyers and regulatory bodies will lead to regular delays within the business, but structural growth opportunities and its proven ability to consolidate will ultimately lead to strong, but lumpy, long-term earnings growth - the company's own target is 15 per cent a year. We see a fair value range for the share price of between 1,210p and 1,390p. If the company utilised all available cash flows to buy back its own shares, we estimate that EPS growth would improve by 2 to 2.5 percentage points, while still maintaining a 2 per cent dividend yield. Expect adjusted pre-tax profit of £54.4m in 2014, giving adjusted EPS of 69.5p (from £50.3m and 65.4p in 2013).

Canncord Genuity says...

Sell. Share price weakness is likely to continue until Synergy begins to generate some traction in the US. Sales there are also likely to be at lower than the company margin, which, in addition to a higher tax rate, means the region's EPS contribution is likely to be lower. And delays with the facility in Marcoule, France, slowed EU sales in the first half. Once these issues are resolved there will be a step up in revenue, which could provide some upside in later quarters of the year. However, we maintain our 902p price target given "outsourcing opportunities" are already built into consensus forecasts and the risk to forecasts remains on the downside.