Spire profits up as it expands to meet the private healthcare boom

In early 2020, when we reviewed Spire Healthcare’s (SPI) prior year results, we noted that “history shows us that healthcare groups and excess leverage do not mix”. That statement still holds true, and it’s an important consideration if you’re weighing up investing in the private healthcare group. The bulk of that leverage falls within lease liability obligations under the IFRS 16 accounting standard, although it is noticeable that net bank debt increased by a quarter last year. Cash payments of £117mn linked to financing costs and interest on leases accounted for 54 per cent of net operating cash flow through the year – a significant and largely unavoidable burden.

The contra side of the investment argument centres on the rapid growth of the private healthcare sector in the UK. This contributed to a 24 per cent increase in adjusted operating profit to £130mn, and there is every reason to believe that benefits on this basis will continue to accrue. Spire notes that admissions were up by 5.3 per cent to 276,705, reflecting “particularly high demand” from private medical insurance patients. Activity at the group’s self-pay (SP) unit continues to exceed pre-pandemic levels. To meet this swelling demand, the group has been establishing new clinics, expanding capabilities and capacity, all of which entails capital demands.

The pandemic has accelerated demand for private healthcare, and the number of patients paying directly for private hospital care has increased dramatically as NHS waiting lists stretch into the distance due to changing demographics. Spire’s forward rating of 20 times consensus earnings is not extravagant compared with sector peers, but it still assumes solid top-line growth. The challenge for management is to expand the thin net margin. This can be achieved through scale, so it wouldn’t be surprising if the group attracted further suitors. Speculative buy.

Last IC view: Buy, 217p, 14 Sep 2023