Large opportunity in healthcare recruitment

Healthperm is an international healthcare professional recruitment company serving the UK, Ireland and Middle Eastern markets (primarily the United Arab Emirates (UAE) and Saudi Arabia, Kuwait, Qatar and Oman). The company deploys permanent, experienced nurses mainly from the Philippines, which is an attractive market for the recruitment of nurses to work overseas and is a country where Healthperm has a well-established presence. Healthperm is well placed to benefit from a shortage of permanent nurses in its core markets of the UK and the Middle East. The UK should be a high growth market for the company, with an increasing shortage of nurses caused by a decline in trainees, higher levels of retirement and lower levels of recruitment from the EU due to Brexit. The Middle East, where the UAE is Healthperm’s main market, is an active region, especially as nurse numbers are low compared to the population and healthcare demands are rising.

Our base case valuation for Healthperm is 288p per share, which values the company at £24.9m and provides 121% upside to the current 130p share price. Our valuation is DCF based, which we feel is appropriate for people-heavy/asset-light business services companies that should also be strongly cash generative. Still early stage, we expect Healthperm to make losses until 2019 and for profits to increase substantially thereafter, and we believe a DCF better reflects this phasing.

Overview

Healthperm is a healthcare recruitment business, established in 2015 to address the shortfall in healthcare professionals in the UK and the Middle East through the provision of qualified Filipino staff. Healthperm listed on the NEX Growth Market of the London Stock Exchange in 2016. It has a fully licensed recruitment operation in the Philippines, and sales operations in the UK and the Middle East. The company has more than 60 full-time employees. In 2017 it placed a total of 48 appointments in the UK and over 200 in the Middle East.

The four main businesses of Healthperm are a Philippines-based recruitment company; a UK-based resourcing company; a UAE-based resourcing company; and a UAE-based language training company (see Exhibits 1 and 2).

Healthperm manages the complete recruitment process for candidates and employers, with local-based recruitment in the Philippines, India and the Caribbean (Exhibit 3). It only supplies permanent employees, rather than temporary ones. In permanent recruitment, a company is paid a one-off fee, usually a percentage of an employee’s salary. The fee may be spread across the different stages of recruitment, for example, in Healthperm’s case, a proportion when a nurse accepts a role and a proportion when they are deployed. Nurses will pay their own language-training costs.

The international market for nurse recruitment is fragmented. In both the UK and the Middle East, Healthperm’s main competitors are Drake International (ASC in the Philippines), a UK-based, international recruitment company; OMANFIL, a Philippines-based recruitment company active in a range of sectors, founded in 1978; and IPAMS, a Philippines-based recruitment company active in a range of sectors, founded in 1972.

Healthperm’s goal is to become the largest provider of permanent experienced nurses and other healthcare professionals, initially from the Philippines into the UK and the Middle East. Healthperm’s management has said that the focus for growth will be organic, although it may consider acquisitions in the medium to long term. In the medium term, it is also interested in developing new country opportunities, both to source healthcare professionals and to find new customers. The company may also seek to move into related markets, eg beyond recruitment for nurses into recruitment for doctors and other allied health professionals, eg radiographers.

The Philippines represents a good base for Healthperm due to its tradition of sending nurses overseas. Around 85% of Filipino nurses work abroad, where salaries can be up to 20 times higher than locally. Nursing is seen as a respected profession in the Philippines, but this has led to oversupply with 200,000 unemployed nurses, which provides a pool of potential candidates for Healthperm. There is a range of financial and social factors that encourage nurses to leave the Philippines (Exhibit 4). Healthperm has a local presence, with offices in Manila and Cebu.

Healthperm is benefiting from a growing shortage of nurses in the UK & Ireland. In 2016, a report into the topic by the Migration Advisory Committee (MAC), commissioned by the UK government, led the government to place nursing on the UK’s ‘shortage occupation list’. In the NHS’s financial year 2017/18 Q3 there were 35,835 vacancies for nurses in the UK, representing 10.3% of total roles (source: NHS Quarterly Provider update).

A key reason for the UK nurse shortage is an ageing nurse workforce, with one-third of nurses aged over 50 and therefore approaching retirement. Also, NHS budget cuts have reduced the number of new joiners, with a 17% cut in nursing training places from 2009 to 2013, while the switch from student bursaries to loans for nurses discouraged applicants. Brexit has also had an impact, with a 96% reduction in recruitment from the EU in the year after the referendum. Last year, the EU comprised 6% of NHS staff (Exhibit 5).

Albeit from a low base, nurses from outside the UK and EU/EEA are becoming increasingly important, comprising 9% of new joiners in 2016/17, up from 7% in 2014/15 (Exhibit 6).

To try to fill the staffing gap, the NHS has increasingly relied on temporary or locum staff. However, this is expensive, leads to workforce instability and does not address the issue of a lack of permanent staff. A 2017 report, published by the Open University, highlighted that the 146 hospital trusts surveyed spent £1.5bn per year on temporary nursing staff, enough to pay for the recruitment costs of 66,000 nurses and equivalent to an annual cost of £2.4bn if extrapolated to all UK trusts. As the NHS seeks to cut the cost of employing temporary agency staff, this offers an opportunity for Healthperm, which only provides permanent employees so helps to address the staffing gap. In our view, permanent nurses offer a more cost-effective outcome than temporary nurses.

In our view, Healthperm should find a ready market in the NHS for employees from the Philippines given that they are already the third largest nationality in the NHS (Exhibit 7).

Healthperm currently has contracts with eight NHS trusts, which service 16 hospitals (Exhibit 8), and is in final discussions with a number of other hospitals. In 2017, Healthperm deployed 48 candidates from the Philippines into the UK. In August, Healthperm won its largest ever contract in the UK, with the Medway NHS Foundation Trust. Healthperm also recently won its first contract in Ireland.

Healthperm only offers candidates who have passed either the International English Language Testing System (IELTS) or Occupational English Test (OET) qualifications in their home country before they apply. Although these tests are not required by the NHS at point of interview, they are required on commencing employment. This policy is a differentiator to competitors and has resulted in 85% of the candidates put forward for interview being offered a position.

Candidates have not usually been to the UK before and Healthperm focuses on providing good pastoral care, for example meeting candidates at the airport and arranging the first month’s accommodation. After arriving in the UK, nurses need to pass a test of competency called the Objective Structured Clinical Examination (OSCE). The national OSCE pass rate is 58%, whereas Healthperm’s pass rate for deployed nurses is 96%. For the first time, Healthperm is applying for inclusion on an NHS framework for the international recruitment of nurses. The framework is for the North East, East England and London. This will be the first time that Healthperm has an opportunity to gain inclusion on an NHS framework. Failure to achieve framework endorsement is a risk, although it is worth noting that companies do not have to be on the framework to win business. We consider the framework an endorsement that helps companies to win more business. Scotland and Wales do not operate frameworks.

Healthperm does not currently provide employees for the private sector in the UK, which comprises 15% of nurses and midwives. We think the private sector could be an opportunity for Healthperm, especially as, according to the company, 40% of nurses in the sector were born outside the UK.

Like the UK, the Middle East should be an active market for the recruitment of permanent nurses from the Philippines. Nurse penetration levels are generally lower in the Middle East compared to developed countries. The UAE, Healthperm’s main country in the region, has a particularly low level of nurse penetration at 31 per 100,000 people (Exhibit 9).

In the UAE, demand for more nurses is likely to be led by a number of factors:

The Middle East is the main destination for Filipino overseas workers, with the UAE the second most popular country, although we note that this included all workers, not just those in healthcare (Exhibit 10).

In the Middle East, Healthperm has private healthcare clients in the UAE, Qatar, Oman, Kuwait and Saudi Arabia (Exhibit 11).

In 2017, Healthperm deployed over 200 candidates into the Middle East. In 2018, Healthperm won a new contract for a major hospital in Kuwait and commenced a pilot project for a large hospital group in Saudi Arabia, the first time it has operated in the country. We think Saudi Arabia, in particular, should offer a significant opportunity for Healthperm given that the country is the top destination for Filipino workers. Also, Saudi Arabian contracts tend to be larger than in the UAE.

In 2017, Healthperm opened its own dedicated IELTS and OET training centre in the UAE. The centre only provides training for GCC-based international nurses seeking to move to the UK or Ireland, through a fixed 10-week programme for all the qualifications they need. Healthperm is the only recruitment company that operates a language training centre, and we think this will provide it with a further source of candidates to work in the UK and a better chance of placing those nurses. Since opening the training centre in Q417, Healthperm has enrolled 176 students.

Healthperm is examining new regions, to both create new supply and demand and reduce its dependence on the Philippines, the UK & Ireland and the Middle East.

In recruitment, Healthperm specialises in nurses but is looking at entering the doctor market. We think the doctor market should be appealing as doctors are paid higher salaries and in the UK are almost twice as likely as nurses to come from outside the EU (Exhibit 12). We do not foresee any barriers to Healthperm moving into the doctor market.

The UK private healthcare sector could also be a new market for Healthperm. The UK’s private sector is smaller than the NHS, at 14% of nurses vs 81% respectively (Exhibit 13), but we note that 40% of nurses in the private sector were born outside the UK. However, Healthperm has said that it is currently prioritising the NHS market over the private market, which we think is logical given the NHS market is still very underpenetrated for Healthperm.

In the UK, outside the hospital market, we believe that Healthperm could look at supplying nurses to the ‘care home’, for ‘care at home’ and to dental surgeries, markets which it currently supplies in the Middle East.

Healthperm is a young company with only three years of accounts and is likely to see fast growth. In reaching our valuation, therefore, we have made a number of assumptions. Variations around these will provide upside/downside to our valuation. Our key assumptions are:

Our preferred measure for valuing companies is a DCF. We think this is particularly useful for valuing Healthperm as the company is likely to be loss making until during the course of 2019, but we then expect a substantial increase in profits as revenues ramp up. DCFs also lend themselves to valuing business services companies, which are people- rather than asset-based and are usually highly cash generative. Applying the assumptions outlined above, our base case valuation of Healthperm is 288p per share, which values the company at £24.9m, and represents 121% upside to the current share price of 130p (Exhibit 14). Our DCF uses a WACC of 8.9% and a terminal growth rate of 1.0%.

There is clearly scope for valuation upside beyond our base case should, for example, deployment numbers grow at a faster rate, which could in turn enhance operational leverage and consequently margins. Management is confident of achieving margins above those assumed in our base case.

In the tables below we set out a range of sensitivities for our DCF. The main sensitivity lies in the revenue growth that we assume, noting that the company was only formed in 2015 and current revenues are at a low base (Exhibit 15).

One of the main sensitivities in our model is the EBITDA margin reached in our last forecast year of 2029 (Exhibit 16). Healthperm is currently loss-making but as nurse volumes placed ramp up, the business should benefit from good operational gearing, especially as much of the infrastructure needed has been built.

We forecast that Healthperm will be loss making until during the course of 2019, which makes comparable company analysis difficult. However, for illustration, we show below the trading multiples for the recruitment companies that we see as Healthperm’s natural listed peers (Exhibit 17). While current peer multiple comparisons are clearly not immediately relevant at this stage, they provide a point of reference for Healthperm’s potential value once it matures into profitability.

Healthperm was founded by David Sumner, who was initially the CEO and is currently the non-executive co-chairman. He has a record of more than 15 years of developing businesses focused on the healthcare and clean technology sectors. Steve Howson, who succeeded Mr Sumner as CEO in June 2017, worked with him at Shire and Medicsight. Prior to becoming CEO, Mr Howson had been a non-executive of Healthperm. He has a strong track record in strategic planning, and both domestic and international expansion in the pharmaceutical and healthcare sectors. We think that both Mr Sumner’s and Mr Howson’s backgrounds in the healthcare market are especially applicable to Healthperm.

Healthperm was founded in 2015 and listed on NEX in 2016 through a reverse listing by which it was acquired by Yujin International, with the latter subsequently renamed Healthperm. The 2015 and 2016 accounts were restated with the reverse listing.

Healthperm is currently loss making, but we expect the company to reach break-even during 2019. The move to profitability will be led by the 159% CAGR (2017-20) we model in revenues based on our estimates of the increase in the number of nurses that Healthperm will place, and also on an increase in the fees charged, for example as Healthperm speeds up the process of a nurse joining. As mentioned above, our forecasts envisage 35% CAGR revenue growth from 2019 to 2029.

Our forecasts are mainly based on three variables of an assumption of nurses deployed (we assume a base figure of around 2,044 deployments by 2020), a fee per nurse and a gross margin, separately for both the UK and the Middle East. In the initial forecast period (2018-20) we estimate a 241% CAGR in nurses deployed in the UK and 73% in the Middle East, as Healthperm ramps up.

Healthperm’s gross margin was 73.4% in 2017, which we slightly increase to 75.9% by 2020, mainly as we think the company can improve its pricing as it speeds up the process of placing nurses through better selection and training.

We forecast a sharp increase in operational gearing, mainly as Healthperm invested heavily in setting up its infrastructure in the last two years and should now see the benefits from the number of nurses placed increasing.

Recruitment is a people- rather than asset-intensive business, so capex is likely to remain relatively low at 1% of revenues. Working capital is the main use of cash, although we model an improvement in the position as we believe that as Healthperm becomes larger it will be able to negotiate better payment terms with its customers, eg being paid earlier in the recruitment process for nurses. We model working capital/revenue of 1%. The growth in working capital is currently financed by loan notes, as discussed above. We do not expect Healthperm to pay a dividend while it is in its initial growth phase.

At end 2017, group net debt was £2.6m, up from £0.3m at end 2016. We forecast net debt to rise to £5.1m by end 2018, mainly due to the costs associated with Healthperm’s start-up phase. We would expect the company’s net debt level to decline after 2020 as it moves into profit. Its current sole funding source is the loan notes that expire at the end of 2019. We think it likely that Healthperm may look to alternative funding sources to the loan notes, either debt or equity, to finance the group’s growth plans. As Healthperm is currently loss making, our usual preferred leverage metric of EV/EBITDA does not apply.

On 7 August, Healthperm issued an upbeat H1 pre-close statement. The statement said that there had been “184% growth in revenue to approximately £293,000 in the six months ended 30 June 2018 (2017: £103,000)”.

At the end of the statement, Mr Howson commented that “The first half of 2018 has seen us make further progress by winning a number of new accounts across our key geographies. The extension of our recruitment licence in the Philippines combined with the partnership agreements in new territories will serve to ensure we are well positioned to meet the increasing demand for our services. We look forward to updating shareholders further with the release of our 2018 interim results in September.”