The +40% recent reduction in share value has been driven by several factors, principally:
1. Lack of faith in the executive and Board’s strategy to increase profitability on a sustainable basis. The market wants firm, concrete reductions in costs that will improve profitability immediately, happy to then see the Leapfrog initiatives bear income growth in the longer term eg the promised $1m EBIT uplifts per centre in 3 years etc.
2. Long term decline in the profitability of pathology. Pathology margins have been eroding for over 5 years; promises of rental reductions, closures etc and other initiatives to increase profitability have simply not been achieved. The market is frustrated that as one of a few oligopoly players in this sector in Australia, the executive team has failed to return this ‘primary’ division of the company to increasing (%revenue) profitability.
3. A range of initiatives that have basically gone nowhere. Again frustrating the market are individual non-core initiatives that have not borne any enhancement in shareholder value:
- the private billings medical centres acquired, millions spent over the last few years, continue to make losses and have failed to deliver improved shareholder value
- the millions spent on the Asian escapade; Over $6million has been written off on Asian expansion strategies that are generally considered to have been swept under the carpet and hopefully unnoticed by shareholders as value destroying. They haven’t been unnoticed.
- balance sheet recycling initiatives like sale and leaseback if fixed assets etc. Again, not a lot of shareholder value, if any, created by it
4. HCP remuneration model changes: the changes introduced around 2016 have lead to a significant deterioration in shareholder earnings, I believe a lot higher than ever modelled by the company. The switch to greater variable remuneration shares to doctors have delivered a significant hit to core earnings that the company has not been able to recover from, despite annual promises it will eventually turn. Simply, the doctors have taken the extra cash given to them per visitation and not worked the extra time to compensate the company for it.
5. The Gregg affair; the stench may have caused irreparable damage to tenures, to the point where new institutional investors are unlikely to invest until there is real governance change.
6. Clumsy capital raising and profit downgrades; the $2.50 capital raise was shortly followed by the wages error, difficult to stomach as an unknown matter at the time of the capital raise market release. This is aside from the capital raise using a lot of funds for what others would consider to be routine capex, where another $20m or so was wasted on the wages clawback error.
7. Financial reporting transparency: this company would be an award winner for ingenious ‘normalisation adjustments’ that normalise profit up. I have never seen such repeated incidents of treating expenses as ‘once-off’, always a sign all is not well. It needs to be immediately banned by the Board as its use is now considered abused at this company.
Until we the above matters have been comprehensively addressed, without spin, the market will continue to downgrade the conpany’s Equity value.
HLS Price at posting:
$2.28 Sentiment: Hold Disclosure: Held
(20min delay)
