Capitol Health’s results reflected a challenging 2016 financial year, but were broadly in line with forecasts
On 1 August 2016, Capitol Health (‘Capitol’) provided a trading update to the market on its full year results. The audited full year results are expected to be announced to the market in mid August. A link to the announcement is available here.
We note that shareholders took a 20% price hit to their Capitol shareholding following the result, which was due in part to the company suspending its dividend. For bondholders, a dividend suspension can generally be viewed as a prudent measure.
A summary of the key points from the update are provided below:
- Revenue is expected to be $158m (up 42% on FY15 and up 3% on research forecast). The revenue growth has come from acquisitions completed in 2015 and 2016, however the industry saw revenue weakness throughout the financial year which impacted Capitol’s profits
- Core radiology EBITDA is expected to be $23.0m before business development costs, which is slightly up on FY15 ($22.2m) and broadly in line with research forecast ($22.9m). Second half core EBITDA translated to $12.1m, or an 11% increase on the first half EBITDA ($10.9m). The improvement in the second half performance reflects a recovery in imaging volumes outlined further below
- Other significant items include a non cash impairment ($8.1m) of goodwill associated with the NSW acquisitions. At the end of December 2015, Capitol had $138m of intangibles, mostly representing the goodwill relating to acquisitions. Allowing for individually significant items, the normalised net profit before tax figure is expected to be around $10m
- Net debt of $87m includes $16m of cash, implying a FY16 net debt / EBITDA ratio of 3.8x which is broadly in line with the research forecast of 3.7x. Financial leverage increased over FY16 as a result of weaker than expected operating performance and the use of debt to fund acquisitions over 2015 and 2016
- The Board has decided to suspend the final dividend – based on research forecasts this is expected to save $1.8m in cash. The suspension of the dividend and weak FY16 result sent Capitol’s share price down by around 20% on the day
Capitol has faced a challenging FY16, impacted by disruptions to referral patterns, the continuing Medicare Benefits Scheme (MBS) review as well as regulatory and political uncertainty. Financial leverage, as expressed by the net debt / EBITDA ratio, is high at 3.8x with limited headroom to incur additional indebtedness under the bond documentation. Further deterioration in financial leverage could see the company raise capital, another reason that may explain the equity performance.
However, on a positive note second half volumes showed improvement on the first half of the financial year. The figure below highlights the improved volume growth rates in the second half (3.4% overall growth) versus the first half (1.6% overall). Improved growth rates were seen across all modality (ie: imaging service) types:
Source: Capitol Health
The Capitol Health 8.25% bond maturing in May 2020 is currently indicatively offered at a yield to worst* of around 7.30%. On relative basis, Capitol offers one of the highest credit spreads in the FIIG unrated bond universe, reflecting its relatively high financial leverage. For example, credit spreads on the Capitol bond are around 70 basis points above IPG and McPhersons per the figure below:
Source: FIIG Securities
*In this instance, the yield to worst represents the yield to maturity.