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Australian investors eagerly await the upcoming IPO of the second largest private hospital operator and largest integrated health care provider, Healthscope. Said to be the largest IPO in four years, Healthscope could bring in as much as $2.7 billion. The company has already signed commitments from Perpetual, AMP Capital and BlackRock, to the tune of $1.7 billion.

Healthscope investors could reap the benefits of the company selling off its real estate portfolio within 12 months after the IPO.  Healthscope CEO Robert Cooke reportedly responded to questioning about the possible sale of the real estate assets with the observation “European private hospital operators rarely own all their properties.”

Despite all the frenzied hysteria accompanying this offering, many experts advise retail investors to be cautious when considering jumping on board a new float.  Given that this one is in a growing sector (baby-boomer retirements and increasing life expectancies), Healthscope scores a lot of points. Many investors would be aware of the stunning growth of the nation’s largest private hospital operator, Ramsey Health Care (RHC). Here is the chart for RHC since it opened on the ASX on 30 September 1997.

 

As you can see, those who got into RHC expecting a quick profit were disappointed.  Many IPO’s, regardless of sector, follow a pattern of short term spikes followed by declines as initial investors begin to take profits.  Unfortunately for the retail investor, it is close to impossible to get in at the offering price which typically goes to institutional and some high net worth investors.  Retail investors must wait for the opening price which is more often than not higher than the offering price.

As a possible alternative to getting in on the Healthscope IPO, we searched the ASX Health Care Index for stocks with low Price to Earnings Ratios and High Dividend Yields.  The lower P/E – High Yield combination sometimes represents an undervalued stock.  Sometimes it flags a stock in trouble.  The following table lists 7 stocks with P/E’s at around 15 or below and Dividend Yields of at least 3.5%.  We included RHC for comparison purposes.  Here is the table.

Company

(CODE)

Market Cap

Share Price

52 Week % Change

Dividend Yield

P/E

Forward P/E

2 Year Earnings Growth Forecast

2 Year Dividend Growth Forecast

Ramsey Healthcare (RHC)

$9.3b

$46.20

+31%

1.6%

34.2

23.5

14.2%

20.7%

Primary Healthcare (PRY)

$2.4b

$4.65

-3%

4.3%

14.6

12.9

9.4%

14.4%

Sigma Pharmaceuticals

(SIG)

$839.9m

$0.75

-1%

5.3%

15.6

15

10.6%

5.7%

Australian Pharmaceutical

(API)

$290.4m

$0.60

+19%

5.5%

11.7

9.92

11.3$

8.3%

Acrux Limited

(ACR)

$178.2m

$1.07

-70%

7.5%

5.7

9.7

147%

9.1%

Clover Corp

(CLV)

$65.7m

$0.40

-36%

5%

13.9

13.3

ITL  Limited

(ITD)

$17.6m

$0.21

-32%

6%

8.4

Cryosite Limited

(CTE)

$17.3m

$0.37

-24%

4%

13.96

ICSGlobal Ltd

(ICS)

$8.5m

$0.04

+72%

3.5%

14.3

The question investors are asking about Ramsey is does it have more room to run.  Although the P/E’s are high and the dividend yield is low, the growth rates in both earnings and dividends are more than just respectable.  Ramsey is adding hospitals at a pace to rival big box retailers in the past decade.  Ramsay recently announced the acquisition of a private hospital network in France, and has operations in the UK as well.  The company already has hospitals in Malaysia and Indonesia and is casting its eye on China’s growing middle class. 

Analysts are less enthusiastic with a consensus Hold rating.  However, there are three analysts recommending Buy and one with an Overweight rating.

To the uniformed investors, focusing on low P/E-High Yield stocks seems like simple common sense.  However, that combination could be the result of some potentially serious problems with the company that market participants have spotted.  Acrux Limited (ACR) provides an example.

Acrux develops healthcare products that are delivered through the skin in spray or liquid form.  Although it has three healthcare products in distribution, the company’s testosterone treatment, Axiron, is responsible for its former status as a market darling.  The stock price began to rise as Acrux signed partnering agreements with US based Eli Lilly to manage the distribution of Axiron in the US.  In February this year investors learned that the US FDA (Food and Drug Administration) was reviewing testosterone treatments as a result of two clinical studies pointing to potential cardiac and stroke risks.  Here is a ten year price chart that shows the rise and fall of ACR.

Clearly the P/E of 5.7 is the result of market reaction to the news, with the dividend yield rising as the share price dropped.  Financial analysts and experts occasionally remind us that markets “shoot first and ask questions later” which may be the case with ACR.  

First of all, the FDA is still on record as saying the benefits of testosterone therapy outweigh the risks.  In addition, at least one of the cautionary studies is under scrutiny and the FDA has issued no warnings to stop using the drug.  In addition, Axiron is not the company’s only “claim to fame.”  Acrux has a diverse line of treatments under development and already in distribution.  The two year earnings growth forecast for Acrux is staggering, and obviously assumes the concerns over Axiron will be short-lived.  The consensus estimated EPS for FY 2014 is $0.20 per share, rising to $0.252 in FY 2015.  The company should be reporting FY 2014 Full Year Results sometime in late August.  Investors willing to take the risk could be in for a substantial reward should the estimates prove true.  Analyst consensus opinion has the stock at Underweight.

Primary Health Medical Ltd (PRY) offers a wide range of health care services to providers serving patients.  These include diagnostic imaging technology; pathology laboratory services; and health technology software.  In addition, the company operates day surgery centres and eye clinics as well as Medical Centres for private medical practitioners.  

Primary Healthcare has seen revenues and profits increase in each of the last three years, with net profit close to doubling, rising from $78 million in FY 2011 to $150 million in FY 2013.  Dividends more than doubled over the period, rising from $0.08 per share in 2011 to $0.175 in 2013.  Half Year 2014 results were positive, with revenues increasing 5.4% and net profit up 8.6%.  The results were announced on 12 February and the share price fell.  Here is a one year chart for PRY.

Note the first sharp drop roughly coincides with the Federal Elections.  Investors were apparently concerned about the new government’s health care policies and the recently released federal budget did call for fee structure changes in areas central to PRY’s business – bulk-billed standard GP consultations and out-of-hospital pathology and imaging services.  However, the impact of the changes remains to be seen and Primary is set to benefit from another change.  The Department of Immigration and Border Protection (DIBP) awarded BUPA Health Insurance an arrangement to provide immigration related health checks and other medical services.  BUPA has sub-contracted with Primary Health Care to provide radiology, pathology, and medical assessments in selected areas.

Consensus analyst opinion on PRY is Overweight, with three Buy recommendations, one at Overweight, and four at Hold.  However, while some see the growing need for preventive health care services more than making up for fee structure changes, there is little question the company is at risk of further funding cuts and more government regulation.

Competitors in prescription medicine and pharmaceutical products Sigma Pharmaceuticals Ltd (SIP) and Australian Pharmaceutical Industries (API) both face risks to changes in the PBS (Pharmaceutical Benefits Scheme).  In addition, discount pharmacies are pressuring margins.  Both own and operate branded pharmacies and distribute health care related products.  Over the past year, API shareholders have fared better than Sigma shareholders.  Here is a one year price movement chart.

API may have an advantage over Sigma in that its franchised Priceline Pharmacies offer low cost prescriptions while company owned Priceline Stores offer non-prescription health and beauty products.  The company announced an asset write-off prior to releasing Half Year Results, which showed a 4.9% revenue increase and a 29.6% underlying profit increase, excluding the impairment charge.

In contrast, Sigma reported Full Year 2013 results on 27 March with a 1.1% increase in revenue with a 2.2% drop in underlying NPAT.  Investors with some risk tolerance may see an upside to these companies that outweighs the downside of government regulation.  Simply put, baby boomers are coming and they will be living a lot longer, using a lot more drugs and other health remedies.

The remaining four companies in the list may seem suitable for punters only, but at least one – ICSGlobal (ICS) seems to have caught the eyes of investors, with its share price rising 72% year over year.  This company listed on the ASX in 1999 and throughout its history has owned medical billing companies in Australia, the US, and the UK.  In 2010 ICS sold off its other holdings, maintaining “earn out” payment arrangements with the buyer of its US business, to concentrate exclusively on the UK wholly owned subsidiary, Medical Billings and Collections (MBC).  The move was a good one for the company and its long term shareholders, who have seen 50.3% average annualised rate of total shareholder return over the last three years, and 56.6% over the past year.  The share price began to rise in late 2012 and is up 400% over the past two years.  Here is the chart.

ICS reported Half Year Results on 27 February with a 27% increase in revenues; an 88% increase in NPAT; a 202% increase in operating cash flow; and coupled a special dividend payment with its interim dividend.  This stock is far under the radar of many, but management states they are looking for new business opportunities, which considering the track record, should earn the stock a place on a watch list.

Clover Corporation Limited (CLV) has been on the ASX since 1999 and now focuses its technological expertise on omega-3 oil nutritional supplements for infant formula and children’s and medical foods.  The company has a manufacturing plant for tuna oils and an R&D facility for product development.  Clover could be considered a “high-tech” nutritional company with some of its product formulations undergoing clinical testing for hospital use, among others.

While the share price has suffered over the past year, long term holders have seen the stock price appreciate 100% over five years.  Here is the chart.

The company grew both revenues and profits between FY2012 and FY2013 but the Half Year 2014 Results were dramatically impacted by an event out of the company’s control.  In August 2013 a New Zealand manufacturer of Whey Protein Concentrate used in infant formula recalled one of its products due to possible contamination.  Although the recall did not directly involve Clover products in any way, it did affect some of their customers, affecting their sales revenues.  As a result, HY2014 results showed a 26.8% decline in revenues along with a 48.7% fall in NPAT.  

On 30 June the company issued an update stating market conditions had not yet improved and forecasted a 40% drop in year over year revenue.  On a positive note, management announced a new infant formula product that has already begun shipping with a second formulation tailored to the Chinese manufacturers who will use their own sources of omega oils.  In addition a large scale Phase 3 clinical trial is underway, testing one of the Clovers medical foods products for use in lung disorders in premature infants.  This study is being conducted at 50 hospitals in four different countries. 

ITL Limited (ITD) is in the medical device business.  The company’s acronym stands for Innovating Technologies for Life. The devices include generic packs of disposable items needed for surgical procedures as well as assembling customised procedure packs to meet the requirements of customer medical practitioners.  The company also sells disposable products for a variety of medical needs, from blood banking to monitoring kits to sterile scissors and on and on.  ITL products are used in 35 different countries.

On 12 February the company’s Half Year Results disappointed investors.  Profit declined 17% and revenues fell 2%.  On 30 June ITL issued a market update, advising that performance for Q2 is below expectations, with management now forecasting Full Year 2014 profit of approximately $1.9 million, 25% below the FY 2013 profit of 2.46 million.  The share price had been rallying following the Full Year 2013 results announced in August 2013, but has been falling ever since.  Here is the chart.

If you believe in the future of stem cell therapies, Cryosite Limited (CTE) may be worth a look.  Cryosite was the first biotech company in Australia to be licensed for private cord blood storage back in 2001.  As the term implies, cord blood is what remains in the umbilical cord and placenta after birth.  Cryogenically storing (think freezing) the blood allows parents the opportunity for possible future use if their children developed medical conditions treatable with stem cell therapy.  Cryosite also stores samples used for medical trials as well as adult stem cell storage for patients undergoing chemotherapy.  

Cryosite recently expanded its adult stem storage business to include patients undergoing osteoarthritis treatment.  Regeneus Ltd (RGS), a regenerative medicine company, announced a joint arrangement with Cryosite for development of a procedure for storing additional cells for patients undergoing Regeneus’s HiQCell® stem cell therapy treatment.

Although the company’s dividend is unfranked, risk tolerant investors with the patience to wait have done well with this company.  The average annual rate of total shareholder return over 5 years is 32.3% and 61.5% over three years.  The stock is up almost 300% over five years.  Here is the chart.

Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au. You should seek professional advice before making any investment decisions.

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