LONDON, Sept 4 (Reuters) - Shares in some healthcare companies have taken a
knock in the past year, but investors see value in a sector that enjoys a
growing customer base and solid government funding.
Operating in areas such as nursing and hospital services, the sector
combines of attractive long-term growth prospects and defensive qualities.
"We've got an ageing population and globally people are demanding better
and better healthcare for longer," said Charles Spicer, chief executive of
healthcare investment specialist MDY Healthcare. "The demographics are fantastic
for this sector."
In Britain, national healthcare spending has massively outstripped the
growth in people of pensionable age. Figures from the UK's Office for National
Statistics show healthcare spending rose by 50 percent from 2001 to 2006 to 109
billion pounds ($193.3 billion), as the population over the age of 65 grew by
just over 3 percent to reach 8.6 million.
Synergy Healthcare Plc , which provides decontamination,
laboratory and laundry services to the healthcare industry, typifies the
strength of the sector.
The company, whose pretax profit rose 114 percent to 18.9 million pounds
($33.5 million) in the year to March 2008, has benefited from regulatory change
as the government moves to outsource healthcare services, and has a reliable
customer base.
By Wednesday, the company had seen its share price rise by 30 percent
from its April level, against a FTSE All Share index that fell almost 7 percent
in the same period.
Healthcare Locums Plc is another company whose stock is on the
up, rising from around 60p just over a year ago to some 125p. Kate Bleasdale,
its chief executive, says: "We've got an ageing population and we haven't got
enough people who are coming into the caring profession. We've got a mismatch of
demand and supply and that's why our company is just going to grow year on year
on year on year."
TOO LATE?
So many such stocks in areas like hospital services have already risen
sharply in recent months, which has made valuations less than compelling.
What's more, recent market moves show significant stock-specific risk
because companies are often heavily dependent on large contracts or single
important products.
"You have to look very closely at valuations and you have to look very
closely at risk. If a company loses a big contract ... you can lose a lot of
money," MDY's Spicer said.
Certainly in recent months, investors in some stocks have endured shock
therapy.
Last November Nestor Healthcare , a provider of staff to the
healthcare sector, saw its shares drop by over 60 percent in a week as it issued
a profit warning.
Shares in Corin Group Plc collapsed by over a fifth in May
after its U.S. distributor Stryker Corp slashed forecasts for its Cormet
hip replacement system.
But analysts say the value is still there.
Martin Whitbread, an analyst at Morgan Stanley, recommends Synergy,
Southern Cross Healthcare and Germany's Rhoen Klinikum .
Synergy, he said, benefits from regulatory change in hospital
decontamination services and international expansion.
Management has a good track record, he added, saying his price target was
1100p. The stock traded at just over 800p on Thursday.
Synergy trades on a relatively expensive multiple of 18.5 times forecast
earnings according to Reuters data. But Whitbread said there were catalysts for
future earnings growth, and pointed out that the company was cash generative.
Southern Cross, a UK care home operator, has a lower estimated P/E of
7.3 having disappointed investors in June with a profit warning due to lower
than exected occupancy levels at its care homes. But it is benefiting from a
property sale announced last week, which brings confidence the company will soon
be fully rehabilitated, said Whitbread.
His price target is 207p while the stock traded Thursday at about 140p.
German hospital operator Rhoen Klinikum, trading on some 22 times
forecast earnings, benefits from privatisation of public hospitals in the
country, Whitbread said, adding that changes to the reimbursement system in 2009
could offer significant earnings upgrades.
However Whitbread was less keen on French care home operator Korian
(France) , which he said was not creating any shareholder value. Its
estimated P/E is around 23 times.
Nomura Code analyst Charles Weston said ease of entry into the market
should be a key focus for investors.
He highlighted Smith & Nephew Plc as an example of a company which
is protected by the regulatory difficulties in launching products such as its
BHR hip replacement.
Other companies have reached critical mass, such as Advair diskus maker
Consort Medical , Weston said. Its estimated P/E is around 12.
He also highlighted the importance of companies controlling their own
routes to market, for example Corin which relied on Stryker to train up surgeons
and sell its device, tasks in which it has had only limited success to date.
(Editing by David Holmes) ($1=.5638 Pound) Keywords: HEALTHCARE BRITAIN/
tf.TFN-Europe_newsdesk@thomson.com
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