Report
Daniel Ragonese
EUR 850.00 For Business Accounts Only

Morningstar | Transferring Coverage of No-Moat Primary Health Care, AUD 3.50 FVE Unchanged

We reiterate our AUD 3.50 per share fair value estimate for Primary Health Care as we transition coverage to a new analyst. Our no-moat and medium fair value uncertainty ratings are unchanged. Shares in Primary Healthy Care currently trade at a meaningful discount to our fair value estimate.

We continue to project earnings per share growth of around 7% a year on average during the next five years. The government is increasingly focusing on preventative health, which typically results in superior health outcomes, reducing pressure on public finances. This benefits around 50% of group earnings which are generated through the diagnostic (radiology and pathology) divisions. The group should also benefit from an ageing and growing population, which will drive greater demand for medical services, supporting our mid-single-digit revenue growth expectations on average during the coming years.

We forecast group operating margins to expand to around 12% by fiscal 2023, up from our 10.5% fiscal 2019 forecast. Given the high level of operating leverage within the firm, general practitioner, or GP, numbers within the medical centres are a crucial component of the expected margin uplift. The medical centres are currently underutilised, and the network operating at below full capacity, which leaves considerable scope to add practices and services for several years.

Government payments are responsible for most of Primary’s services. While this has been beneficial to-date, it can be a double-edged sword. The constant threat of increased regulation or budget cuts could put pressure on earnings. While we don’t expect any changes to be debilitating, they could constrain growth. An example of this would be the government limiting growth in the scheduled Medicare rebate for GP consultations.

Most of the company’s earnings are derived from the medical centre segment, and while it benefits from a cost advantage over smaller players, we continue to believe this is insufficient to justify a moat rating. The industry is highly fragmented and barriers to entry are low, and the ongoing risk of increased competition constrain patient growth at Primary’s centres.
Underlying
Healius

Primary Health Care is a medical center operator engaged in providing diagnostic imaging services and pathology services. Co. operates three principal operating segments: Medical Centres, which provides a range of services and facilities to general practitioners, specialists and other health care providers; Pathology, which provides pathology services; and Imaging, which provides imaging and scanning services from stand-alone imaging sites and from within the consolidated entity's medical centres.

Provider
Morningstar
Morningstar

Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.

Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.

We have operations in 27 countries.

Analysts
Daniel Ragonese

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