Spire 'should benefit' from more NHS funding in medium-term

After Theresa May announced a 10-year plan that included a £20bn a year increase in funding for the NHS by 2022, analysts at Berenberg believe that the medium-term potential acceleration in NHS volume growth for Spire Healthcare "outweighs longer-term potential lower self-pay growth".

The changes should increase the annual funding uplift by around 1% a year from the level over the last two years, and by 2% from increases over 2010-2015, which Berenberg said should serve to ameliorate the pressures on the parlous state of the NHS's finances.

"However, in the longer run, this level of increase may still be insufficient to deal with the demographic drivers of healthcare demand in the country, and one commentator described the funding as just a 'giant sticking plaster'."

In the very near term, little change is expected in NHS referral patterns and self-pay demand, until April 2019, with the recent decline in NHS block contracting revenues more likely to continue.

But in the mid-term, hospitals may choose to utilise some of this funding to reduce elective waiting lists, which "should benefit independent hospital operators" such as Spire, the analysts said. "The NHS’s own capacity is dependent on infrastructure investment, which is likely to remain too low, and personnel, which take time to recruit."

In the longer run, increased funding to the NHS is seen as incrementally negative for Spire "as some patients that may have self-paid may be able to treated in the NHS".

But Spire’s five-year strategy "remains achievable", with management expecting a 2% annual average decline in NHS, 14% annual growth in self-pay, and 3% annual growth from private medical insurance, as well as growth from Spire's new hospitals in Manchester, Nottingham and St Anthony’s in South London.

"There is a chance that the funding increase could improve the NHS outturn over this period, although at the expense of slower self-pay growth, but Spire’s £200m+ 2022 EBITDA target should still be achievable, in our view."

Berenberg's 290p price target is based on nine times EBITDA, which is the lowest multiple of its peers due to recent earnings volatility and momentum.

"However, should the company return to growth as we project, we think there could be a re-rating potentially doubling shares over a two-year period."