Spire Healthcare to cut investment as profits collapse

Profits at Spire Healthcare remained in intensive care in the first half of the year after an "unprecedented decline" in admissions of NHS patients, but management remained confident in their new strategic direction.

The dividend was held at 1.3p per share as directors reiterated their confidence in the 'reset' strategy announced in April, which aims to drive the share of private healthcare of the business to at least 80% of group revenues.

Half-year results from the FTSE 250 group, which had been extensively previewed in early August, showed revenues down 1.1% to £475.6m but operating profit before exceptional and other items down 41% to £31.6m, or down 25% once exceptionals were added in.

Profits were down due to the collapse in NHS admissions, lower than anticipated growth in private admissions and planned investment in operations. Overall private income was up 2.5%, however.

Earnings before interest, tax, depreciation and amortisation declined 20.6% to £66.1m in the six months to 30 June, with a 53% crash in adjusted profit after tax to £16.4m and adjusted earnings per share to 4.1p.

Inpatient and daycase admissions fell 4.1% to 133,700 cases, with two newly developed hospitals in Manchester and St Anthony's in South London have improved their profitability while there were continuing start-up losses from the new hospital Nottingham.

Chief executive Justin Ash pointed to an "unprecedented decline (both in scale and speed) in NHS admissions" as the cause behind the disappointing results and revised outlook for the financial year as a whole.

For the full year, management expect EBITDA will be £120-125m, after charging non-recurring items of approximately £5m. Year end net debt is expected to be broadly in line with current levels.

"Nonetheless our overall revenues are broadly flat as the growth opportunity in our private business, 2.5% in the period, continues to support our shift in strategic focus," said Ash.

"While the prolonged decline in NHS volumes had negative margin implications for us, overall our H1 2018 costs were in line with our budget, even after the previously indicated increases in spend on the clinical quality and our private proposition.

"We continue to review our non-clinical costs to ensure optimal efficiency. We have also robustly reviewed our previously proposed capital expenditure plans, and now expect to maintain the quality and capability of our asset base with a reduced level of expenditure."

Ash said the struggles of the sector "may lead to opportunities", hinting that Spire could pick up business from rivals.

"I believe our reset strategy is absolutely the right one for Spire and that Spire continues to be well positioned to reinforce its leading role in the independent sector and indeed in UK healthcare as a whole."

Shares in Spire fell 7% to 157.2p by 0835 BST on Tuesday, after earlier hitting a new all-time low of 148.6p.

Morgan Stanley said: "As Spire adjusts to the new market environment, impairment losses have started to come through and, while Spire highlights a five year target of EBITDA of £200m, we see the path as unclear without a significant turnaround in trends, not just in the NHS business but also in Self-Pay and PMI where growth would need to accelerate."

Analysts felt that cost savings "should bridge some of the gap" and optimisation of hospitals and staff costs "may help", though without the NHS business stabilising "margin expansion towards the high teens level will be challenging".

Morgan Stanley was supportive of potential consolidation in the industry, though with the net debt at around 3.8 times EBITDA "there may be limited assets of the right size and value and the ability to do so may be limited", meaning closure of competitor hospitals "may be the more likely scenario, in our view".