Accelerated Efficiency Program Will Deliver Significant Savings By 2026

Key Takeaways

• Efficiency programs and investment in digitalization aim to expand margins, enhancing both net earnings and operational efficiency.
  
• Strategic NHS partnerships and revenue growth strategies support predictable and sustained revenue growth.
  
• Rising national insurance costs and energy prices, coupled with changes in revenue mix and NHS focus, could pressure margins despite strategic shifts and expansion plans.

Catalysts

Owns and operates private hospitals and clinics.

• The acceleration of the efficiency program aims to deliver £80 million in cumulative savings by the end of 2026, which is expected to drive margin expansion and improve net earnings.
  
• The continuation of above 5% growth in hospital revenue, alongside maximizing private mix and high acuity work with the NHS, is expected to support overall revenue growth.
  
• Expansion of primary care services, with the aim of making it at least a £40 million EBITDA business in the medium term through contract wins and new clinic openings, will positively impact revenue and EBITDA.
  
• Strategic partnership with the NHS and ability to adapt to changing payor mix are expected to support predictable revenue from NHS referrals and price management.
  
• Investment in digitalization and efficiency, such as implementing hospital tablet registration and opening patient support centers, is expected to reduce costs and enhance operational efficiency, contributing to net margins improvement.

Spire Healthcare Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Spire Healthcare Group's revenue will grow by 5.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.7% today to 5.2% in 3 years time.
• Analysts expect earnings to reach £92.8 million (and earnings per share of £0.23) by about March 2028, up from £25.4 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting £108 million in earnings, and the most bearish expecting £68.6 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.2x on those 2028 earnings, down from 28.5x today. This future PE is lower than the current PE for the GB Healthcare industry at 17.0x.
• Analysts expect the number of shares outstanding to decline by 0.32% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.91%, as per the Simply Wall St company report.

Spire Healthcare Group Future Earnings Per Share Growth

Risks

• The announcement of plans to increase national insurance and the National Minimum Wage, coupled with rising energy costs, could result in significant cost pressures, impacting net margins unless efficiencies are successfully implemented.
  
• The slowdown and moderating demand in the self-pay market, partially compensated by growth in Private Medical Insurance (PMI), poses a risk to revenue mix stability as the company navigates changes in consumer behavior.
  
• The pivot towards NHS referrals and high-acuity procedures, while strategic, has impacted margins due to lower profitability of NHS work compared to self-pay or PMI services, potentially affecting overall earnings.
  
• The end of energy hedge agreements may lead to increased operational costs, which could squeeze net margins if not countered by the company's efficiency and cost-saving programs.
  
• Expansion in the primary care market and the integration of new services entails execution risks, particularly if short-term margin pressures arise from opening new clinics and integrating small M&A, potentially impacting earnings growth.

Valuation

• The analysts have a consensus price target of £2.934 for Spire Healthcare Group based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £3.4, and the most bearish reporting a price target of just £2.55.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £1.8 billion, earnings will come to £92.8 million, and it would be trading on a PE ratio of 16.2x, assuming you use a discount rate of 8.9%.
• Given the current share price of £1.8, the analyst price target of £2.93 is 38.6% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.