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With a record 6.8m people on NHS waiting lists, I have been looking at a FTSE 250 stock that is helping to ease the backlog.
Spire Healthcare (LSE:SPI) is the UK’s biggest private hospital group by revenue, owning 39 hospitals and 8 clinics across the nation.
Even saying the phrase ‘private healthcare’ is enough to garner dirty looks in some social circles in the UK.
However, that piques my interest further. The less ‘sexy’ an investment theme is, the more chance I have of getting in at a reasonable price. Unpopular though they may be, private providers are playing an increasing role in the healthcare space.
In the first six months of 2022, Spire Healthcare saw revenue from private patients rise by 30.9% compared with the first half of 2019.
Pandemic loser’s time to shine?
During the height of the pandemic, Spire Healthcare put its buildings, equipment, and staff at the NHS’s disposal. The NHS paid the firm for services commissioned during this emergency period, of course. Still, it wasn’t enough to keep Spire Healthcare from suffering a loss (adjusted before tax) of £18.5m in 2020.
In 2019, Spire Healthcare had made an adjusted profit of 1.8 pence per share. By 2021, that had gone negative, with the firm losing 3.6 pence per share.
Still, the stock price kept on a steady march upwards despite the negative earning prints, from a 2019 high of 139p to 250p by the end of 2021.
That is because markets are forward looking, and it was clear that a massive patient backlog would be created by the NHS suspending elective procedures to focus on Covid.
First, the good news
Inflation is at the forefront of investors’ minds this year, and Spire Healthcare can plausibly claim to be less affected than most businesses. According to research carried out by the group, the “typical private patient is able to access the funds for private care, and healthcare is a key spending priority”.
In addition, Spire Healthcare says it has locked in supplier pricing over the medium term and that it is being selective in its product choices to further tame the impact of inflation on its bottom line.
The group has also lightened up its debt load just in time for the rising interest rate environment, paying down £100m of bank debt in Q1 of this year and getting its net debt to 2.2 times EBITDA, the lowest leverage ratio it has recorded since 2016.
A sacred cow…
The factors that are currently tailwinds for Spire Healthcare could quickly turn against it in my view. The NHS is a sacred cow in Britain, and I would not bet on private providers being able to capitalise on the public sector’s woes for long without political fallout.
In 2019, the Labour Party manifesto stated its ambition to end the use of private providers in the NHS. If enacted, that would have wiped out around one-quarter of Spire Healthcare’s revenue.
Considering Spire Healthcare’s rich price-to-earnings (P/E) ratio of 141, I think investors have become too euphoric without taking sufficient stock of the political risks.
For that reason, I wouldn’t buy shares in Spire Healthcare, despite the numerous headlines about patients turning to private providers in frustration at NHS waiting lists.
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