HSP

Last week, global markets stumbled following reports that China was looking to impose controls to curb its rapidly growing economy and concerns that a soft landing for the US economy may be more difficult than first thought. In the background, the Australian reporting season continued its final week, here are analyst Macquarie Research Equities (MRE) observations and thoughts. The HY December 2006 aggregate earnings reported for the market printed 1.5 percentage points below analyst expectations versus those held at the start of this reporting season.

Healthscope (HSP) have a 12 month share price target of $6.05 and an Outperform stock recommendation from shares analyst Macquarie Research Equities (MRE). MRE also note that current political and economic trends would generally point toward sustained industry health for the foreseeable future. The stock has drifted 6 cents lower despite announcing that they will build a new 142 bed hospital in North Western Sydney at a cost of $52m. Macquarie Research Equities (MRE) estimate that the hospital will not make a contribution to earnings until FY12 even under optimistic guidelines. MRE believe this announcement is more relevant for the implications of the industry dynamics. Greenfield hospital developments have been rare since the late 1990’s, when a number of projects almost crippled hospital groups. MRE highlight Westmead Private hospital which took Alpha Healthcare to the brink of collapse. This however was later acquired by Ramsay (RHC). The most recent Greenfield project of size was the new Epworth Hospital in Melbourne which is also struggling under the weight of its fixed costs. MRE have an Outperform recommendation on HSP.

Macquarie Research Equities have reiterated their Outperform recommendation for the Healthscope (HSP) stock with a 12 month share price target of $5.15. They have commented that the company result was better than expected and that their margins were better than expected. HSP achieved a 14.3 percent in underlying EBITDA margins in 2H06, which is typically a seasonally weak half in private hospital operations.

Is this an opportunity? The way I look at it is that this opportunity has a medium risk to it - you need to track this one of you want to participate. Their 12 month price target is $6.55 which is an upside of almost 50% above yesterday's closing price...

"The second largest private hospital group in Australia plunged to an 8 month low of $4.38 after announcing that weak pathology earnings in NSW and Victoria would result in the company’s human pathology earnings falling below that forecast in their December 2004 prospectus."