In hindsight, we were a little optimistic in March when we suggested that Spire’s (SPI) fortunes may be set to turn. So were the investors who sent the group’s share price up more than a tenth before a profit warning knocked away those gains. The private hospital provider thinks adjusted cash profits will fall to £66m in the first six months of 2018, from £83m last year, while annual numbers will be “materially lower” than the £150m reported in 2017.
The group’s main problem is that NHS revenues – where the group obtains a fee for taking on non-emergency work from the public health service – have fallen by nearly 10 per cent, while demand from insured patients was flat. But this most recent turnaround in expectation has been caused by lower-than-anticipated demand from paying customers. Self-pay revenues rose 8 per cent in the first six months of the year, compared with underlying growth of 14 per cent in 2017.
Despite demographic trends driving up demand for hospital services, Spire is struggling to capitalise on this potential. That’s partly because of the political challenges surrounding private healthcare in England, but recent management upheaval can’t have helped the group, either. New chief executive Justin Ash has initiated a strategy to focus on private patients and reduce the group’s reliance on unpredictable NHS revenues by improving the quality of services. That seems sensible, but this latest update shows that it is likely to take a while before Spire begins to reap the rewards of this strategy.
Spire’s turnaround is not going to happen overnight, but we remain optimistic that the group is on the right road. With a new strategy which should help it capitalise on the positive trends in the market, we think a recovery could be due and the shares, trading on 17 times forward earnings, fail to take this into account. Buy at 188p.
Last IC View: Buy, 217p, 15 Mar 2018