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FTSE 350: NHS pressure remains a boon for private sector

NHS budget pressure will continue to benefit the healthcare equipment and services sector this year
January 26, 2017

Unyielding pressure on the NHS benefited private hospital providers in 2016 and it’s a trend that’s likely to continue this year. An ageing population, increased prevalence of chronic diseases and funding shortages have badly affected the UK’s free healthcare service, driving more patients to private providers such as listed group Spire Healthcare (SPI).

So it’s not surprising to see the UK private hospital market attracting attention from investors – including from overseas. A number of US private equity companies have sought to take advantage of the increase in NHS outsourcing by investing in UK private hospitals, while an Australian company recently opened some hospitals in the UK. We continue to think Mediclinic (MDC) might follow suit. The South Africa-based hospital provider could enter the UK market by taking over Spire, with which it shares a major shareholder. Mediclinic joined the London market in February 2016 following its reverse takeover of Middle East hospital operator Al Noor. In completing this deal Mediclinic was forced to ward off the advances of another UAE-based hospital provider, NMC Health (NMC). NMC may feel as though it has got off lightly in being outbid for Al Noor; the Abu Dhabi-based business hasn’t performed well for Mediclinic after health insurance changes in the Emirates sent patients towards state-run hospital services. Conversely, NMC has had a stellar year, with acquisitions in the complex care space boosting revenue per patient.

There is also positive momentum behind UDG Healthcare's (UDG) shares. The pharmaceutical packaging and marketing company has benefited from increased outsourcing by drugmakers. UDG is one of only a few major players in a highly fragmented marketplace, which should play in its favour as pharma outsourcing looks set to increase further this year.

In the healthcare equipment space, Smith & Nephew (SN.) has gained another peer. In October, ConvaTec (CTEC) became the biggest London IPO of the year. It specialises in dressings, colostomy bags, catheters and surgical suction devices. Its products are not in direct competition with Smith & Nephew, but it’s likely to attract similar investors.

Price (p) Market value (£m)PE (x)Yield (%)1-year change (%)Last IC view
Convatec2414,709NA0.0NANA
Mediclinic7985,88024.71.1-1.2Hold, 838p, 11 Nov 2016
NMC Health1,5863,24033.50.2106.0Buy, 1321p, 30 Aug 2016
Smith & Nephew1,21610,65119.11.810.2Hold, 1245p, 02 Aug 2016
Spire Healthcare3121,25116.91.22.9Buy, 342p, 25 Aug 2016
UDG Healthcare6571,62721.81.519.2Buy, 625p, 25 Nov 2016

 

Favourites: Spire and UDG are both well placed to benefit from positive trends in their markets. We have also recently turned more bullish on NMC after a stream of acquisitions boosted growth prospects. The shares performed well in 2016 and we expect them to continue to do so this year as benefits from the acquisitions are realised.

Outsiders: We're less convinced about the prospects for fellow international hospital operator Mediclinic. The group’s Middle East division is struggling as patients turn increasingly to state-run hospitals, which looks like a longer-term structural challenge..