Hello and welcome to Stock Watch Live.
Two stocks to take a look at this week.
The first is Spire Healthcare, the UK independent hospital group, which in January issued a second profit warning that prompted many investors to sell their shares. The announcement extended a decline that had wiped out almost two-thirds of the group’s stock market value in just six months.
The problem started when the group’s shares fell by a fifth in August last year, when the company said that earnings for the year would be “materially lower” than 2017 as a result of cutbacks in National Health Service spending and a decline in patient numbers.
So it’s interesting to see broker RBC Capital Markets initiate coverage of Spire, with an “outperform” rating and 149p-a-share price target, just ahead of its half-year results due out on Monday.
In its assessment it notes optimism about NHS referrals, which have typically provided more than a quarter of the group’s revenue.
In a note it said: “Our analysis of recent NHS activity data, including new specialism-level metrics, indicates that the high-margin orthopaedics segment has driven a strong acceleration in NHS revenues, which we expect to result in a positive surprise in the first half 2019 — we would buy into the results on September 16.”
It all seems to hinge on a switch to private heathcare and largely rests on public dissatisfaction with NHS waiting times which is high- and has been for some time - but has not deepened in recent years.
Any recovery in NHS spending could be the start of a new chapter for Spire, with longer term expectations underpinned by increased visibility on cost control and an acceleration in revenue from self-pay patients.
“If the company is able to beat consensus, as we expect, we believe that value-based investors will begin to revisit the story,” RBC said.
Other brokers are clearly also watching the stock. Numis has repeated its buy rating and cut its price target from 280p to 163p.
UBS has also initiated coverage with a neutral investment rating and a more cautious price target of 120p.
The broker said it has seen evidence of Spire prioritising growing its private payer business over taking NHS patients. However, it said past management guidance to grow self-pay at 15 per cent a year looked optimistic.
There has been some good news from Spire recently. In May it said it was "on track" to meet full-year market expectations following the end of its first quarter.
In August it announced that it had agreed to extend an existing collaboration agreement with health insurer Bupa until March 2022. And the month earlier it said it had agreed a new long-term pricing contract with private healthcare insurance provider AXA PPP Healthcare to March 2024 and again as with the Bupa deal it had also agreed pricing during that period.
According to Spire, the renewed contract with AXA PPP Healthcare represents a strengthening of the relationship between the companies and further progress in Spire Healthcare's PMI business, which represented 46.5% of total sales in 2018.
Spire’s shares are currently trading around the 120p mark.
Another company that has had its work cut out trying to convince shareholders that things are on the up is Petra Diamonds.
Back in July it moved to reassure investors following recent share price weakness by reminding the market that its business remains robust.
That followed comment from a broker that suggested a cash call could be imminent, which sent the shares plummeting to just 9p.
Broker Berenberg said that due to Petra's deleveraging being slower than it expected, as well as further weakness in the diamond price, the risk of a further equity financing had increased.
Downgrading the stock from “buy” to “sell” with an 8p target price, cut from 15p the broker also said it was concerned about Petra’s ability to repay its refinanced debt by the time mines reach the end of their life.
Petra’s own target of delivering up to $200 million of free cash flow between 2020 and 2022 has built in a level of optimism, including $45 million from the fall of the South African rand, Berenberg said. Its own forecast for the period was for $135 million in free cash flow, which would leave Petra needing to refinance some $475 million of debt.
In its defence Petra’s management team gave a mid-July trading update in which it revealed that capital expenditure had reduced to $81.7 million, and it had $17 million of cash in the pot. That sent the shares up 25% to just over 20p.
However, there was no getting away from the fact that annual revenue fell 6% because of lower gem prices and also that production volumes are forecast to fall in the current financial year.
Revenue for the year through June had fallen to $463.6 million, down from $495.3 million year-on-year, which the company said reflected a weaker diamond market.
Production increased slightly to 3.87m carats, which the company said was in line with its guidance. The quantity expected to be produced in 2020 is expected to be a similar 3.8 million carats or so.
Once worth $1.5 billion, Petra’s value has dropped in recent years as it has piled up debt to expand Cullinan, the iconic South African mine where the world’s biggest ever diamond was found in 1905.
JP Morgan Cazenove has so far remained neutral on the stock but raised its price target 5p to 35p. RBC Capital Markets rates it a sector performer and has cut its price target from 40p to 23p. While Barclays Capital has retained its overweight investment rating on Petra but slowly chipped away its price target, which now stands at 26p.
Petra’s shares are currently trading at 8p.
And that’s all for this week. For more on the companies as they report in the week ahead go to the Markets & Insights section at Fidelity.co.uk
See you next time.