Primary Health Care: Interim result 2014

Primary Health Care achieved steady growth in the first half of the current financial year, with revenue increasing 5% to $751m and earnings before interest and tax (EBIT) rising 4% to $145m. Net profit and earnings per share each rose 9%, to $76m and 15 cents respectively, helped by lower interest expenses. The interim dividend has been increased by 38% to 9 cents per share (fully franked, ex date 17 Mar), for a current yield of 4%.

Primary’s pathology division performed admirably, with revenue rising 7% to $436m while earnings before interest, tax, depreciation and amortisation increased 8% thanks to higher margins. Primary has the second-largest network of pathology clinics behind Sonic Healthcare and, as we explained in Sonic and Australia's newest duopoly (Hold – $15.85), deregulation of collection centres has strengthened both Primary and Sonic’s cost advantages over smaller rivals like Healthscope. We expect both companies to continue to improve operating margins.

Primary is still weighed down by $1.1bn of bank debt which is the main reason we think it’s wise to avoid the stock. The debt facilities were recently extended by another few years at a lower interest rate which brings some relief. However, interest payments still consume nearly twice as much of operating earnings compared to Sonic.

Management expect earnings per share to increase by between 7% and 13% in 2014. The share price is barely changed since 29 Mar 13 (Avoid – $4.90) and we continue to recommend you AVOID.