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Not a great result but we see most of the factors as short term. Management noted softer revenue growth impacted by softer market conditions. In addition, costs were impacted by wages rising more quickly than private health insurance premium rises (particularly in Victoria). While management saw increased competition in some markets. But new & upgraded hospitals are enjoying strong growth overall.
Investors seem surprised at the scale of the decline in earnings versus the prior year and the company’s share price suffered as a result. Debt is currently sitting near the upper end of our comfort zone, though this should fall after opening of the Northern Beaches Hospital in late 2018, when NSW government will deliver its first patients and pay its agreed share.
Noise around rapidly increasing private health insurance costs and the falling level of cover selected by consumers, along with the major expansion program of Healthscope will continue to muddy results through to the completion of Northern Beaches (Sydney) in FY19.
While this year’s result was disappointing the causes do not appear to be insurmountable. An ageing demographic and rapidly rising health care costs will, in the long run, see governments find ways to encourage private health care membership and this should support Healthscope (and others such as Ramsay Healthcare) over the medium to long term.
Telstra was the second largest detractor (behind Commonwealth Bank) from the index last month after it slashed its future dividend expectations due to increasing earnings headwinds from both the National Broadband Network (NBN Co) and growing competition in the mobile phone industry.
Following its announcement, investors reacted savagely and its shares fell to a level that effectively saw them trade at a price equivalent to their long term 6.5% - 7.0% yield based on the lower future dividend stream.
The dividend cut would afford Telstra a longer timeframe to fill its $3.0 billion operating earnings hole created by the NBN rollout. This maybe a necessary step because it may have difficulty maintaining its new 22c dividend in the long term.
Unfortunately, Telstra’s original plan to restructure the company via securitising 40% of its NBN payment ($5 billion) was recently rejected by NBN Co on the basis that it will create no value to NBN Co (i.e. Federal Government). Under this proposal, $1 billion was to repay debt and $4 billion for a share buyback – effectively increasing its earnings per share.
On the positive side of this rejection by NBN Co, it should give investors comfort that the remaining 60% of the NBN payment will now likely remain a predictable earnings stream for Telstra shareholders.
Ultimately, the high cost of the NBN rollout will remain a challenge for all telecommunications resellers, including Telstra, unless NBN Co looks to re-price its access costs.