Don't know much about PHG.... and granted that we may have different time-frames and investing methods you may not be interested in the questions I would ask, but here they are:
How reliant on their operations is their relationship / contracts with private health insurers? (For instance, HSO & RHC derive a very large proportion of their revenue & competitive positions from their strong bargaining power over the insurers - ie. they own infrastructure in key areas). What contracts are already in place?
How essential is their infrastructure? Where are the nearest competing hospitals? Do the private health insurers give their clients a choice of other alternatives?
What potential is there for their key staff (surgeons / doctors) to bargain higher wages and cause margin pressure? It is often said that doctors want to work for the places with the best facilities etc. This is especially relevant in regional areas. See next question as they are related to an extent.
What is the capex profile like going-forward? Is it lumpy or fairly smooth? How accurate do you think their depreciation calculations are? How does capex (or depreciation) / revenue (or OCF) compare to HSO / RHC?
What is the break-even occupancy level for their beds? I think I read it was 40%. What is the average occupancy level over the longer-term? How would this react to further brownfield expansion?
As you have already mentioned legislation is a risk, and always will be, but you may also want to consider the risk of litigation and how this would effect the company (especially if they have limited facilities vs the bigger players). Hospitals can be sued for negligence if they take on patients and operate in areas outside of their specialisation / capabilities (sounds like a no-brainer, but you would be surprised what can happen).
I find that in light of the Medibank Private IPO there is an interesting dynamic between the private hospital operators and private health insurers... they are both pushing for margin expansion, but they cannot both win at the same time.
Hi Ves,
Thank you very much for the feedback and questions, very astute.
I don't go into as much detail as you - my investment criteria and timescales are different. I take of an "average out" approach. The number of stocks I invest in, it's not really feasibly to be thourough on each one. So, take my opinion with a grain of salt.
Relationship with insurers and essential infrastructure - I suspect they don't have strong bargaining power yet, but it will improve with size. Given that their facilities are either in regional areas, or are for specialized services, it is unlikely there is much competition nearby. The fact that the market is too small to attract much competition is not good, but on the flipside, it improves PHG's competitive position.
They mention in the report that private health cover is quite high (47%). This is possibly a risk if the economy deteriorates sharply and less people opt in for it.
Staff - No doubt, it will be more difficult to source medical staff in regional areas. There are, however, two categories of people that would fit. Those that prefer the lifestyle, and those who recently arrived to the country. I believe certain occupations, such as doctors, are allowed to come to Australia on a condition that they spend the first 2-3 years working in a rural area. While this would create higher turnover, it will also increase the number of available recruits, improving bargaining power in wages negotiation.
Capex/Depreciation - Their depreciation expense has been relatively constant over the last 6 years, ranging between $700k-$1.1m. Capex has grown up to $3.5m, but most of it would be for growth, not maintenance. I don't know the industry well enough to say whether their depreciation allowance is appropriate.
Depreciation/Revenue is 1.5%, which is much lower than RHC and HSO (3.5-4%). So, yes, they are potentially understating it based on these numbers. It does look like a low capex business in all 3 cases, which is a plus.
Also, the fact that operate in niche areas, with mainly single purpose facilities, I think it is quite plausible that their capex really is substantially less than all in one hospitals. Their 3 mains areas of focus are - surgery, rehabiliation and mental health. Rehabilitation and mental health in particular, I would imagine have very litle capex requirements.
Occupancy - Each facility would have its own break even level, and as they are scaling up, this number will change quickly. Also, it also not the only measure. They also have a lot of day procedures that don't require a hospital stay.
Insurance - yes, it is a risk. Margin of safety, etc...