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Credit Suisse cuts Spire Healthcare to 'underperform', halves target price on softer NHS revenues

The Swiss Bank's analysts cut Spire's earnings per share estimates for 2018-2020 by 14-33%, while expecting the group to downgrade its underlying earnings (EBITDA) target for 2022
They said: “We expect UK hospital market conditions to worsen in 2019 and temper Spire's nascent progress in private pay growth"

Credit Suisse has downgraded its rating for Spire Healthcare Group PLC (LON:SPI)  to 'underperform' from ‘neutral’ while chopping its target price to 85p from 170p as it expects UK hospital market conditions to worsen in 2019. 

In a note to clients, the Swiss bank's analysts cut their earnings per share estimates for the FTSE SmallCap firm by 14-33% for 2018-2020 and said that they expected Spire to downgrade its underlying earnings (EBITDA) target for 2022 when it announces full-year results on 28 February.

READ: Spire blames NHS for “disappointing” first-half profits slump and weak outlook

They said: “We expect UK hospital market conditions to worsen in 2019 and temper Spire's nascent progress in private pay growth. Further, soft NHS revenues should impair fixed cost absorption. The structurally lower profitability prompts us to cut the market value of Spire's property from £1bn to £0.5bn." 

The analysts added: “We cut our forecast of private pay revenue growth from 4% to 3% pa while continuing to expect NHS revenues to fall by 2.5% in 2019 before stabilising in 2020E. Reflecting higher fixed costs we expect the operating margin to rise by only 20-40bp pa (reduced from +100bp pa) 2018-20E as revenues are forecast to recover.”

They continued: "We expect staff resourcing and costs to become more burdensome post-Brexit. Raised political sensitivities about waiting lists could prompt a more rapid recovery in NHS revenues than forecast."

The Credit Suisse analysts noted that the halved target price is based on discounted cash flow estimates combined with a sale-leaseback valuation of the property estate.

But, they suggested, Spire’s outlook would improve in the event it was a takeover target at a substantial premium, adding "the probability of which we consider tightly connected to Spire's ability to improve its operating returns”.

In late afternoon trading, Spire shares were down 3.6% to 122.10p.

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