Primary Health Care

Providing health services to an ageing population seems like the ideal business – and it should be. But the red flags at medical centre, pathology and diagnostic imaging group Primary Health Care preclude a positive view. While interest cover has recovered to almost four times, the company’s $1.1bn of debt remains a burden.

The asset side of the balance sheet is hardly bullet-proof either. Weighing it down is goodwill of $3.2bn, a legacy of the 2008 Symbion takeover and ongoing acquisitions of doctors’ practices. What should happen to the goodwill when the company’s doctors leave or retire is debatable but writedowns are a possibility.

For now, Primary shareholders aren’t concerned. Margins in all three main businesses have shown substantial improvement over the past 18 months. The imaging division in particular has staged a remarkable turnaround.

The good news continued in the 2013 interim result. Revenues rose 5% to $721m, while net profit jumped 50% to $70m, equivalent to earnings per share of 13.8 cents. But the cash-consuming nature of Primary’s business model gives it a forecast 2013 dividend yield of just 2.9%, albeit fully franked.

The share price has jumped 63% since mid-2012 but is down 11% since 11 Aug 09 (No View – $5.53). AVOID.

James Greenhalgh has recently rejoined Intelligent Investor Share Advisor as an occasional freelancer.