Spire Healthcare profits plummet 75pc after medical malpractice payment

The hospital operator had revealed the previous day that it was taking a £28m provision against medical malpractice settlements for victims of disgraced surgeon Ian Paterson, which added to start-up costs from two new hospitals to drag profit before tax down 75.1% to £8.9m on revenues up 2.4% to £481m and underlying operating profits down 8.5% to £53.9m.

At an underlying level revenues grew 3.8% in the first six months of the year but in July and August slumped 0.1% year on year, as sales to the NHS plunged 5.1% after growing 5.9% in the first half.

Management believe the reduction in its NHS work is due to recently introduced measures to reduce elective referrals.

The trend "appears to be continuing" in September and so the company fear group revenue in the second half of 2017 may be flat compared to that of 2016, while NHS tariff reductions and trading losses from a new hospital in Nottingham lead management to expect operating profits margins could be nearer 16.1% than the previously guided 16.8%.

Analysts at Numis calculated that this would equate to a revenue downgrade of 2% on market expectations and a reduction of 2-6% to consensus EBITDA expectations.

Meanwhile underlying revenue growth from 'self pay' healthcare grew 14% in the first half and has been even healthier at 15.1% in the two months since, leading interim chief executive Simon Gordon to claim it was a "satisfactory first half in line with our plan".

"Although it is disappointing to report that growth in our NHS business appears to be slowing to some extent in H2 2017 and to accordingly have to revise our outlook for FY 2017, our correspondingly strong self-pay growth in H1 2017 demonstrates that our core strategic proposition remains valid.

"NHS waiting lists are now at their highest since 2007 (when Choose & Book was introduced), and look set to continue to grow as patient choice and eligibility for treatment are actively restricted by CCG policies.

"With this in mind, we are increasingly focusing the business on the self-pay opportunity and on our existing robust healthcare insurer arrangements, while emphasising the need for a strong well-invested independent sector to meet the growing shortfall in elective care provision."

Adjusted basic earnings per share fell 9% to 8.7p and operating cash flows shrank 15% to £75.7m to enable the interim dividend to be maintained at 1.3p per share.

Shares in Spire lost more than a quarter of their value in the opening minutes of trading on Thursday to below 230p but recovered slightly to 255.36p after around an hour, still a fall of more than 18%.

Broker Numis said revenues and adjusted EPS were ahead of its phasing expectations, having anticipated an acceleration into the second half from new hospital openings and the turnaround at St Anthony’s but that the downgraded revenue and margins equated to EBITDA of £151-157.6m, a decrease of 3-7% year-on-year.

"While we await further insight at the analyst meeting into potential up-tick from new hospital openings into FY18, we would expect a knockon impact on market expectations for FY18E."

Investec anticipated consensus downgrades of circa 2% to sales and circa 5-6% to EBITDA.

Longer term, the bank still believes Spire is well positioned to grow private pay revenues as patients choose not to wait for NHS treatment.

"We continue to believe in the positive dynamics of the private market over the longer term, with greater numbers of patients paying privately for procedures rather than waiting to meet the strict criteria for NHS treatment, but expect the shares to be weak today."