Spire Healthcare warns over 2018 earnings

Spire Healthcare warned on Monday that 2018 earnings will be "materially" lower than the previous year amid weakness in the NHS business and increased investments.

The company, which is due to announce its first-half results in September, said revenues were down 1.1% on the first half of last year to around £475m, while earnings before interest, taxes, depreciation and amortisation, before exceptional items, were approximately £66m at a margin of about 14%.

Capital expenditure was £34m versus £59.5m in the first half of 2017 and net debt at 30 June was £458m compared to £436.1m.

During the half, self-pay revenues rose 8.3% while private medical insurance revenue edged up 0.9%, but NHS revenue was down 9.5%. Spire said it continues to expect private payer revenue growth in the second half and to see the benefit of its investments in telephony and central marketing and its evolving relations with PMI payers.

However, that growth will be impacted by continuing weakness in the NHS business where it sees new signs of further triaging and rationing in the second half, especially in orthopaedics, as clinical commissioning groups tighten their approach towards managing waiting lists.

Spire said it has invested significantly to improve its clinical quality and to drive its private payor proposition. This is being done through a number of one-off step-up costs, which in turn has led to overall hospital costs increasing ahead of its original estimates. As a result, the impact on earnings has been more marked than anticipated.

"In parallel we have identified and initiated substantial cost saving exercises in other areas of the business, including central functions and procurement. These savings are expected to have a significant impact on our cost base from 2019 onwards, with some benefit in H2 2018.

"In addition we have introduced a much tighter capex environment, and capex for FY 2018 will be approximately £90 million compared to £100 million original guidance and £118 million in FY 2017. This reduction is helping to fund our investments in clinical quality."

Chief executive officer Justin Ash said he expects the top line to recover through the second half of 2018 and increasingly in 2019 and beyond, while the benefit of the group's major cost savings initiatives will accelerate through next year.

Liberum pointed out that self-pay revenue growth of 8.3% was a slowdown on the 13% achieved in 2017 and "will raise questions about the size of the market opportunity at the current price point".

"Spire has delivered a string of profit warnings over the past three years however there was hope that with a new CEO and strategy that 2018 would represent the turning point. While we remain optimistic about CEO Justin Ash's longer term plans for Spire, his credibility will take a hit today and so the reiteration of his 80/100/200 strategy which implies delivering EBITDA of more than £200m by 2022 will be met with scepticism."

At 0820 BST, the shares were down 27% to 180p.