In H115, Circle Holdings (Circle) achieved revenue growth of 28% y-o-y so that EBITDA losses fell to 6.4% of revenue from 12% the year before. Circle does not feel it is under the same pressure on NHS work as its competitor Spire, because it relies less on block bookings for NHS contracts and more on individual choice. The result of the UK general election has reduced some of the political uncertainty that had affected the company and the UK health economy and it is actively bidding for new contracts. Circle has funding in place, in principle, to build a new hospital in Birmingham and planning approval was achieved in September. It has also just announced a joint venture to create an innovative proton beam treatment centre.
Circle has continued to attract more patients at its hospitals and has increased revenue per case at CircleBath and CircleNottingham as it is now carrying out more complicated procedures which earn higher fees. Together with a full six-month contribution from its Bedfordshire MSK contract, H115 revenue increased 28% y-o-y. The combined gross margin at Bath, Reading and Nottingham fell to 33.3% in H115 from 34.5% in H114 with staffing shortages, particularly in nursing and dermatology bidding up staff costs. Administrative expenses rose just 2% so that EBITDA losses fell 32% to £4m. Net cash at the end of June was £16.9m (31 Dec 14: £13.7m), but this was inflated by around £8m from temporary working capital benefits, which reversed in July. Circle believes it can cover initial operating losses at CircleBirmingham and fund its new joint venture from its cash resources and from winning more cash-generative NHS service contracts. Selling its Manchester land (c £5m according to management estimates) or by raising debt are additional options to finance initial operating losses.
Circle anticipates that its success in providing integrated healthcare services in its Bedfordshire MSK contract, where care is coordinated and focused on the patient, will be a template for other such contracts in the UK and perhaps overseas.
Our DCF valuation of Circle’s current activities, which is calculated on a contractby-contract basis and does not include CircleBirmingham or the new joint venture, is 24p per share (16 April 2015: 27p per share, see our outlook note). The current share price of 45.0p assumes 21p of value from new activities. This could arise from the development of CircleBirmingham, the joint venture and two new NHS service contracts or its expansion into international markets.