- Cash profit in line with previously lowered guidance
- Restructuring and higher contribution from insourcing services support profit recovery
Derby-based Totally (TLY:21p), a private provider of high-quality care and workplace wellbeing services, expects to deliver flat cash profit of around £6.3mn for the 2022-23 financial year, in line with previously downgraded estimates.
The combination of high inflation, national strikes – which increased pressure on services and scheduling – and greater reliance on agency staff for the delivery of urgent care services due to clinical workforce shortages, prompted house broker Canaccord Genuity to rein in its annual cash profit estimate from £8.3mn to £6.3mn in March.
To mitigate the cost pressures, the board has restructured operations to bring together all healthcare services under one healthcare delivery business focused on urgent care and elective care, realised economies of scale and cut out duplicated costs to enhance the group’s operational and financial performance. The profit guidance is stated before one-off costs associated with the restructuring.
Moreover, Totally has drawn a line under its north-west London urgent treatment centre (UTC), a major contributing factor behind this year’s share price weakness (‘A sell-off that’s overdone’, 20 February 2023). Importantly, the directors don’t expect any further costs or liabilities from these demobilised contracts.
It means that investors can now focus on the recovery potential of the business, which underpins Cancaccord’s forecast that cash profit can bounce back from £6.3mn to £8.8mn on 3 per cent higher revenue of £144mn in the 12 months to 31 March 2024. A raft of recent higher-margin contract wins adds weight to these expectations.
Contract momentum building
In the past month, Totally has won two contracts (worth £2.15mn to December 2023) for the delivery of urology services to Saolta’s Group’s six hospitals in Ireland. Insourcing Totally’s services for the delivery of colonoscopy, gastroscopy and sigmoidoscopy procedures during weekends when hospital facilities are not otherwise in use will enable Saolta to maximise the efficiency of its hospital infrastructure.
At the end of last year, more than 690,000 people were on waiting lists in Ireland, so there isn’t a shortage of demand for Totally’s higher-margin insourcing services, which provide in-house consultants and nursing teams across certain specialities (endoscopy, ophthalmology, ear nose and throat, orthopaedics and urology).
The same is true in Wales, where a record 730,000 patients are on waiting lists – 59 per cent more than three years ago – with no fewer than 75,000 people waiting more than 12 months for a first appointment. So, to help cut the backlog, NHS Wales is seeking help from the private sector, recently awarding Totally a contract to deliver a full range of medical and surgical services including outpatient and pre-operative assessments, diagnostics and surgical procedures.
What's more, demand for Totally’s corporate wellbeing services has returned to pre-pandemic levels, a trend that is benefiting from an increasing number of employers looking to entice employees back to the workplace.
Recovery potential underrated
Of course, investors are likely to be cautious in the near term. However, a growing revenue contribution from the insourcing services provided by the group’s higher-margin Pioneer Healthcare division is likely to have an accentuated impact on profit for what is now a more operationally geared business following the restructuring.
In fact, Canaccord expects all its £2.5mn forecast rise in cash profit to pass through to pre-tax profit, pencilling in 66 per cent growth in pre-tax profit to £6.3mn in the 12 months to 31 March 2024. On this basis, expect 59 per cent higher earnings per share (EPS) of 3.5p, implying the shares are rated on a forward price/earnings (PE) ratio of six.
There is also an attractive dividend yield of 4.8 per cent on offer based on a maintained payout of 1p per share, and one that looks secure given that forecast free cash flow of £5.2mn (2.7p) should lift net cash by more than a third to £5.3mn by 31 March 2024 after factoring in the £2mn cash cost of the dividend.
So, although Totally’s share price fell 9 per cent after the 2 May trading update, I feel that the foundations are in place for a major re-rating over the coming 12 months. Indeed, the group’s enterprise valuation of £35.6mn equates to four times forward cash profit, a massive 64 per cent discount to its peer group average of 11 times. Buy.
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