Note below from UBS says it all about performance: Business...

Note below from UBS says it all about performance: Business direction appears to be moribund in an overall sense.

1H19 earnings quality makes for difficult analysis, cash flow more instructive

PRY's 1H19 "underlying" NPAT of A$39.4mn declined ~10% vs pcp (14% below UBSe), impacted by a

number of issues (several previously flagged) in pathology and medical centres. Earnings quality was

again impacted by restructure costs (A$22mn pre-tax), which included A$5mn for Project Leapfrog and

~A$6mn associated with Montserrat and redundancies. Gross operating cash flow declined 28% with

EBITDA conversion of ~84% (107% in 1H18). UBS defined free cash flow (= net OCFmaintenance capex

- GP/Med Centre acquisitions/re-signing costs) was –A$7mn vs A$47mn in the pcp. With GP FTE

declining to 925 vs 958 at end 1H18, in our view the cash flow spent on GP hires/acquisitions (ex Health

& Co) represents maintenance capex, as does the ~A$8mn IT-related intangibles (cash) spend.

Earnings lift in 2H19 required even allowing for seasonality and Montserrat

Allowing for Pathology earnings seasonality (45% average 1H weighting over the past 5 years) offset

modestly by Medical Centre seasonality (~55% average 1H weighted, albeit a smaller EBIT contribution

to group) and a A$10mn EBIT benefit from pathology/imaging productivity program, our revised NPAT

forecast of A$91mn, still falls just below the bottom end of revised management guidance (A$93-

98mn). With industry volumes unlikely to recover (and indeed as risk of decelerating into an election

cycle) we continue to see downside risk to the guidance range. Separately, noting A$35mn of capex

spent on GP/Med Centre acquisitions in 1H19 alone, and A$67mn (cash) on Montserrat, in our view, an

improved group EBIT ROIC is required to justify current valuation, rather than a modest increase in

underlying NPAT.