Life Healthcare (LHC) – Lost scale inflicts profitability pain

The wheels came off Life Healthcare’s performance in 1H22 due to the ending of some long- and short-term contracts. Alliance Medical saw the conclusion of its NHS Covid contracts and Healthcare services – its Covid and commercial occupational health and wellness contracts. The group emerged from 1H22 with weakened profitability, a 20% lower cash flow from its operations compared to 1H21 and the worst cash conversion since 1H18.

However, Hospitals and complementary services was resilient and achieved a moderate revenue growth of 5.5% y-y, despite pedestrian increases in its patient days and in revenue per paid patient days. Furthermore, Diagnostic waiting lists in Alliance Medical (AMG)’s primary locations – the UK, Italy and Ireland – are continuing to support scan volumes and revenue generation. Diagnostic imaging modalities in Italy, Ireland and the UK and molecular imaging modalities in the UK accounted for c.90% of AMG revenue, benefitting from the growth in diagnostic imaging in the UK and Ireland. AMG derived the most revenue from Italy’s diagnostic imaging modalities and the UK’s molecular imaging modalities.
We believe increasing occupancy rates observed since February 2022, which are benefitting from the non-Covid patient mix, should continue to support Hospitals and complementary services’ incremental revenue and profitability performance in the short term. Diagnostic volumes are growing, but the impact of the volumes lost from the NHS Covid contracts highlights AMG’s scale deficit. In the short term, the division will continue to experience reduced operational leverage and therefore weakened profitability. Management has indicated that some collections have been made since the end of the interim period and this should lift cash from operating activities in 2H22.