HSP - Healthscope Limited

[Sean K]

Can any market gurus explain to me why HSP would have opened up at $5.17 (from $5.60 close) with a whole bunch of crappy trades?

Stop losses triggered by an incorrect trade. Error?

Recovered back up now, but just darn weird.

 

[Gurgler]

Beats me what happened - but the result is we are now in this stock together as my Westpac buy order at 5.50 was picked up at open @ 5.31 (a bonus 19cents I hadn't counted on! How do they do that?). Strange indeed. Upside this may develop into a dialogue, rather than the loneliness of the long-distance trader!

I agree with you that this will develop into a worthy stock, factoring in the rising importance of the health sector (baby-boomers maturing etc.) and the fact that the Gribbles factor seems to be behind them. Management are still the same, I gather. My experience of health sector management when I was in the industry in the late-80's-early 90's is that there are sharks everywhere. None here I hope!

 

[Sean K]

There was some ann today about the ACCC protesting an acquisition in Queensland. No details atm, I'm in the middle of something else, but this might be a short term negative....

How's the sunshine up there?

 

[ducati916]

Kennas

Just had a very quick look at the numbers on this one [HSP] and it looks ugly. I'll run the full set of numbers tomorrow, or later tonight, and post them when they are completed.

jog on
d998

 

[Sean K]

Kennas

Just had a very quick look at the numbers on this one [HSP] and it looks ugly. I'll run the full set of numbers tomorrow, or later tonight, and post them when they are completed.

jog on
d998

Thanks Ducati.

I have a feeling that this is not going to pass your value test. It's a growth stock relying on lots of acquisitaions and Baby Boomers getting sick. Good in theory.

I first looked at this as it's in Lonsec's Model Portfolio which has performed incredibly well over the past 3 years. Although, past performance....blah blah.

Anyway, very happy to have your analysis/opinion. Cheers.

 

[Gurgler]

There was some ann today about the ACCC protesting an acquisition in Queensland. No details atm, I'm in the middle of something else, but this might be a short term negative....

How's the sunshine up there?

Is this the one K?
"ACCC to oppose Healthe's proposed acquisition of Brisbane Waters Private Hospital

The Australian Competition and Consumer Commission will oppose Healthe Care Australia Pty Ltd's proposed acquisition of Brisbane Waters Private Hospital, ACCC Chairman, Mr Graeme Samuel, said today.

Release # MR 304/06
Issued: 13th December 2006

http://www.accc.gov.au/content/index.phtml/itemId/773125/fromItemId/2332


Were you asking me about the sunshine? It's currently very cold,windy and overcast!

 

[ducati916]

Thanks Ducati.

I have a feeling that this is not going to pass your value test. It's a growth stock relying on lots of acquisitaions and Baby Boomers getting sick. Good in theory.

I first looked at this as it's in Lonsec's Model Portfolio which has performed incredibly well over the past 3 years. Although, past performance....blah blah.

Anyway, very happy to have your analysis/opinion. Cheers.

Understood, but from what I understand it was held through the correction, and now continues to be held as a growth stock.

There are two kinds of growth stock, internal growth & external growth [aquisitative] the second, while it can be successful, is fraught with problems.

jog on
d998

 

[Sean K]

Understood, but from what I understand it was held through the correction, and now continues to be held as a growth stock.

There are two kinds of growth stock, internal growth & external growth [aquisitative] the second, while it can be successful, is fraught with problems.

jog on
d998

HSP is growing both internal and external and this is what I like about it's prospects. Baby Boomers are only just starting to clog up the hospital systems and with a focus in this area the growth over the next 15 years should be very good, as long as gene therapy and nano technology do not make traditional medicine obsolete! Perhaps that will occur in 20 years. HSP has been on the acquisition trail for some time and as long as it keeps it's gearing/debt levels reasonable, and they bed down the acquisitions smartly, then all good. Yes, this is the riskier part of this business. Should be upside in any future private equity snooping around. I am sure the ruler has been run over it, although at this stage I hope I'll be happy to hold for 5-10 years and keep topping up on weakness.

 

[nizar]

HSP is growing both internal and external and this is what I like about it's prospects. Baby Boomers are only just starting to clog up the hospital systems and with a focus in this area the growth over the next 15 years should be very good, as long as gene therapy and nano technology do not make traditional medicine obsolete! Perhaps that will occur in 20 years. HSP has been on the acquisition trail for some time and as long as it keeps it's gearing/debt levels reasonable, and they bed down the acquisitions smartly, then all good. Yes, this is the riskier part of this business. Should be upside in any future private equity snooping around. I am sure the ruler has been run over it, although at this stage I hope I'll be happy to hold for 5-10 years and keep topping up on weakness.

Agree with all your thoughts on HSP. I did the numbers on this stock, spent a long long time, this was in January i think. Then, confident it would be a winner, i bought in, and a week later came a profit downgrade (by HSP) and the share price falls 30%. Gotta love the market.

 

[Sean K]

Agree with all your thoughts on HSP. I did the numbers on this stock, spent a long long time, this was in January i think. Then, confident it would be a winner, i bought in, and a week later came a profit downgrade (by HSP) and the share price falls 30%. Gotta love the market.

LOL. Did you hold on? I bought pretty close to the top too. (same as DCA before it got smashed, and averaged down, and down, until I escaped even. )

Back in front on this now after picking some more up at $5.00.

Fingers crossed, no more surprises to the downside!

 

[ducati916]

kennas

about another blue chip that actually makes money.

This was the line that initially caught my attention, as I remembered the meltdown earlier in the year as someone else had just been caught by the sudden writedowns etc, and was stuck in the stock near its top.

This business earns practically nothing.
How can I justify such a statement?
There are three major areas of extremely high concern [risk]

The first concerns asset sales, and the amount that they account of for Capital Expenditures, it is an enormous 84% of this current Cash-Flow statement, and 67% over the last 5yrs.

Why is this scary?
Simply because, if asset sales did not take place, or could not take place for some reason, Capital Expenditures would need to be funded via;
*Cash-flow
*debt
*equity issue
None of these options are palatable to current holders.
Therefore if CapEx was required to be funded from current Net Profits, they would shrink from $54.9 million, to $8.8 million.

How has it got so bad?
Simply because the purchased assets have been so overpriced.
Goodwill now accounts for 131% of Plant Property & Equipment.

Why is this a problem?
It is a problem as amortization of the Goodwill + Depreciation of PPE now accounts for 54% of the Operating Cash-flow. As it is considered a non-cash expense, people tend to ignore this cost. Incorrect. By doing that you inflate tremendously the cash-flow, and distort the true earning power of the business. Can I prove such an assertion?

Of course.
How has HSP funded the dividend payments, shown Net Profit?
It has issued since 2004 to 2006;
*$294.8 million equity
*$246.8 million debt
*$273.3 million equity
*writedown of Goodwill [to reduce amortization expense]
Total = $814.9 million issued + [- writedown]

There will in the future be almost certainly further writedowns, to relieve the Statements of the requirement to amortize the immense Goodwill component.

Profit margins have decreased from 21.5% to 10.2%
This is a very dangerous development.
One reason is increasing costs.
The other is the huge burden of amortization + depreciation, which is why another writedown is on the cards in the future.

Working Capital.
Not investment grade. The Current ratio is 0.93, up from 0.83, this means that in a credit contraction, they could run out of cash, and go under.

Earning Power of the Assets.
All the purchased assets, improving the earnings of the business?
Well yes they are. They have improved from the truely rubbish of $0.52 per $1.00 invested to the just plain bad $0.72 per $1.00 invested. This is why there has to be so many equity offerings and increased debt, they are not earning any money.

From 2002 to 2006, compounded growth in;
*Revenues 38.8%
*Cost of Goods 42.3%
*Debt 58.2%
*Capital Expenditures 43.7%
*Net Income 20.2%
*Goodwill 275.5%
It is very obvious that the costs of staying in business are fast outpacing the point of staying in business. The two Income components are getting buried under an avalanche of increasing costs.

Why is the shareprice moving up?
Well it's a bullmarket, remember the dotcoms, no earnings, huge valuations.
Just because this has a certain tangible quality to the business don't let that blind you to the fact that the earnings are virtually non-existent, and at some point, that fact may become very apparent.

My valuation, you'll hate it, $0.50 to $0.79 per share is fair value.
I wouldn't touch it below $0.15

jog on
d998

 

[Sean K]

kennas

My valuation, you'll hate it, $0.50 to $0.79 per share is fair value.
I wouldn't touch it below $0.15

jog on
d998

:22_yikes:

Thanks for the evaluation Ducati. I'll have to spend some time going through their annual report to work any of this out.

 

[ducati916]

kennas

No problem.
jog on
d998

 

[Sean K]

kennas

No problem.
jog on
d998

And get a sell order ready!

 

[ducati916]

kennas

As a speculation, with a risk management plan, this is as good as any other speculation, have a tight stoploss.

As a long term investment, under the guise of a blue chip holding, this is a potential timebomb, as again large writedowns or worse could devastate the shareprice.

jog on
d998

 

[Sultan of Swing]

As a long term investment, under the guise of a blue chip holding, this is a potential timebomb, as again large writedowns or worse could devastate the shareprice.

Well, you've almost convinced me to sell!!

I bought in in Feb at 4.23 so might just take my profit and run.

As far as your analysis goes, I don't understand a lot of it however if I was looking at buying it today, it doesn't realy fit my preferred criteria. The interest cover is low, the debt/ equity ratio is way too high and it's return on capital and equity over the years is terrible.

I'll think on it overnight.... I hate when I can see what may happen, don't sell, the worst happens and half the profits go down the drain.

Thanks all.

 

[ducati916]

Well, you've almost convinced me to sell!!

I bought in in Feb at 4.23 so might just take my profit and run.

As far as your analysis goes, I don't understand a lot of it however if I was looking at buying it today, it doesn't realy fit my preferred criteria. The interest cover is low, the debt/ equity ratio is way too high and it's return on capital and equity over the years is terrible.

I'll think on it overnight.... I hate when I can see what may happen, don't sell, the worst happens and half the profits go down the drain.

Thanks all.

Well in the interests of full disclosure, I do not hold, nor intend to hold any positions in this security long or short.

That said, the area that is really murky in the Annual Report [2006] are the distinctions, classifications & clarity regarding Goodwill & Intangibles.

The Company lists no Goodwill at all.
Everything is listed under Intangibles.

Here is where it gets murky.
The Company draws a distinction between organic Intangibles & external Intangibles [pg 39] but does not create a line entry with this distinction. This is important, and goes back to the original problem of CapEx needing to be funded out of asset sales. Intangibles are where the business is developing future asset sales. Should there be a glitch, then CapEx must be funded in the previously detailed manner. Thus, I have simply classed everything as Goodwill, due to the aquisitative nature of the business and calculated from that [same] figure.

Why?

Simply because later, [pg 37] the company states that purchased Goodwill, is not classified separately, but classified as an Intangible. Goodwill is, and will be, if judged to be impaired,

"recognised immediately in the profit and loss and is not subsequently reversed"

This is in essence, pretty much what happened last time.
Nowhere are Goodwill, internal Intangibles & external Intangibles given separate line entries, and the classification seems arbitrary at managements discretion.........very risky.

In regards to Interest coverage, it has fallen from 12 times to 6 times, so a very valid and important observation.

With regards to making money, until this year, it had in real terms [operationally] lost money in 02/03/04/05 its returns are horrendus.

jog on
d998

 

[Sultan of Swing]

In regards to Interest coverage, it has fallen from 12 times to 6 times, so a very valid and important observation.

I won't pretend I know how to read a company report ... yet!

I may be naive. I look at Commsec at the financials and it shows the interest cover at 2.69%. I'm not sure how accurate their calculations are but as I have nothing else that I can use, I do rely on them.

Thanks Ducati

 

[ducati916]

SoS

Their data may be more up to date. I'm simply using the 2006 Annual Report from June, so a little behind. However, had you been following HSP as a holding, this would have been very obvious.

That the coverage is now down to below 3.0, well that says everything is not as it should be and beware should this be an "investment" rather than a "speculation"

jog on
d998

 

[Sean K]

Although Ducati's doom and gloom analysis is concerning, the market doesn't seem to be taking it into consideration at the moment. Traded at $5.70 this am, but has been pushed down by a whole bunch of crappy trades, which I think are mums and dads selling their dividends perhaps. Just weird. I mean a whole bunch of trades between 22 - 300 shares