Circle Holdings — Update 9 December 2016

Circle’s existing operations continue to develop and grow. We forecast more growth to come but as these approach a period of maturation (we forecast positive group EBITDA in 2018), the board and management have given considerable thought on to how to take the group to the next stage. The aim is to grow the existing core operations using the skills and experience that Circle has developed, and add logical extensions where attractive opportunities exist. Construction of a new independent hospital (CircleBirmingham) is expected to commence at the end of this year and an interesting joint venture, taking Circle into the attractive Chinese healthcare market, has been completed. Substantial progress has been made on potential initiatives in medical rehabilitation and proton beam oncology treatment. Circle’s hopes to build on Bedfordshire MSK services management have been given a boost by selection as preferred bidder status for a £74m five-year contract to provide MSK services in Greenwich. Additional new contracts are targeted.

Our valuation of Circle’s current activities, including CircleBirmingham for the first time, undertaken on a contract-by-contract basis using a DCF methodology, is 32p per share. CircleBirmingham has added 8p per share to our previous valuation of 24p. The value of the current operations is significantly ahead of the current share price, but allows nothing as yet for the completed Chinese joint venture or the potential from ongoing initiatives in rehabilitation services, Harley Street proton beam therapy or potential additional MSK service contracts, which add significant additional upside potential. Further progress on these initiatives and confirmation that existing financial resources are adequate to fund new developments are both potential catalysts for a closing of the valuation gap.

In 2015 both the Hospital Services and Other Circle services achieved EBITDA-positive results, the former for the first time, and this continued into H116. H116 patient volumes grew further and revenues were up 6% on the previous year period. After central costs, the underlying group EBITDA loss, which excludes exceptional items and (unlike our EBITDA calculation) Project Reset-related, share-based payment charges (see our outlook note for details), was 47% lower at £1.9m (£3.6m loss on a reported basis). Importantly, financial progress is not at the expense of service quality, with performance being recognised both by patients and the Care Quality Commission (CQC). Patient satisfaction remains consistently high at 99% across Circle hospitals with 87% of NHS work coming through patient choice within the e-referral system. Last year CircleNottingham received an “outstanding” rating for surgery services from the CQC.

Circle’s profitability and continued growth is dependent on a number of factors. The most important of these are as follows.

Circle Holdings (Circle), through its 100%-owned operating subsidiary, Circle Health, is a provider of healthcare services, historically focused on the UK, but making its first steps into international markets through a recently signed Chinese joint venture agreement. It currently operates third-party owned independent hospitals and manages healthcare services and facilities on behalf of the NHS. It has a diversified base of patients, drawn from the NHS, the medically insured and those who self-fund.

Circle was incorporated in Jersey in 2004 and has been quoted on AIM since June 2011. On a fully diluted basis, 25% of Circle’s shares are owned by its employees and independent clinicians through the Circle Partnership Benefit Trust, the largest partnership of doctors, nurses and healthcare professionals in the UK. A significant proportion of the remaining 75% is owned by leading institutions, some of whom have continued to provide financial support for Circle’s development since it first listed.

The participation of the partnership in Circle is designed to provide a beneficial alignment of the interests of all shareholders, employees, clinicians, NHS staff and ultimately patients. The Circle operating model empowers clinicians and staff as a means to provide high levels of patient care and efficiency through active participation in the management of the operations. They can be rewarded for success through co-ownership.

Management and financial and operating reporting for the group is based on the following three segments:

Circle’s first independent hospital, CircleBath, opened in 2010, followed by CircleReading in 2012. These provide hospital services to NHS patients, insured patients and self-pay patients alike. The business model for the independent hospitals has always been focused on Circle’s core clinical strengths and has avoided tying up capital in hospital ownership; both the hospital premises at Bath and Reading were designed by Circle but are leased from third-party owners on long (initially 25-year) leases. As these two hospitals approach operating maturity (CircleBath became EBITDA positive in 2015 and we expect CircleReading to do so, in less time, by the end of this year), Circle is planning its third independent hospital (CircleBirmingham) with construction expected to commence at the end of this year, subject to completion of the third-party financing arrangements.

Circle’s operations with the NHS in Nottingham began in 2008 with a five-year contract to manage an independent sector treatment centre. On expiry, the arrangement was successfully renewed under a new contract with a wider mandate, becoming what is now CircleNottingham. CircleNottingham has been a consistent profit generator, supporting the group during the independent hospital start-up phase. Circle has built a strong relationship with the local Clinical Commissioning Group (CCG) since 2008, and was last year rated “outstanding” for surgery services from the CQC; both should be supportive of contract renewal discussions that are likely to commence next year, ahead of the 2018 contract expiry.

In April 2014, Circle commenced the first capped-budget contract for the management of MSK services in England. Under the contract, Circle has assumed responsibility for the integration of MSK services in Bedfordshire, creating a “prime provider” to provide more co-ordinated and improved outcomes at lower cost. Circle seeks to apply its experience and expertise in other localities, including Greenwich where it is preferred bidder.

As the existing operations approach a period of maturation, during 2015 the board and management conducted an extensive review of the business to assess how best to build on the platform that has been created to build the scale necessary to cover central overhead costs and then generate attractive group returns. The aim is to grow the existing core operations using the skills and experience that Circle has developed, and to add logical extensions where attractive opportunities exist.

Circle has identified a need for improved medical rehabilitation services, an opportunity which plays to its expertise in acute and orthopaedic care. As well as improving patient experience, there is an opportunity to free up badly needed and expensive hospital beds, reduce the incidence of re-admission as a result of inadequate aftercare, and get patients back into work faster. Circle hopes to enter into a partnership with an experienced European provider of medical rehabilitation, with an extensive track record in providing both public and private healthcare services.

Similar to the plans for rehabilitation, the existing Bedfordshire MSK contract demonstrates Circle’s ability to transfer its knowledge from solely acute care built up in the hospitals to primary, community and secondary care. The understanding and expertise required is of the process of integrating care from the referral stage right through to treatment completion. Circle hopes to complete contract negotiations in Greenwich and commence services in Q416 and is actively working to secure additional similar MSK contracts.

The partnership with Advanced Oncotherapy (AVO) to develop a next-generation proton beam cancer therapy system is progressing. AVO’s technology development remains on track and Circle is supporting AVO to secure finance for it. The new technology would reduce the size and cost of the proton beam machine so as to make planned installation in a Harley Street clinic feasible.

Circle has also been exploring opportunities to apply its operational skills and experience in overseas markets. The focus was on China and a 20-year management agreement has been reached with a Chinese investor group to develop and operate an integrated health clinic in Shanghai. This is intended to be state-of-the-art and positioned as a premium brand, offering a range of primary care, diagnostic and treatment services. We expect that Circle will be focused on developing this initiative in the immediate future, but will remain open to other international opportunities.

We briefly review some of these new initiatives below and provide a financial and operational update on the current activities.

Circle has regularly provided updates on its pipeline of future projects. Inevitably, some of these proceed while others will fall away as, for example, contract tenders are withdrawn or are awarded to rival bidders. We are encouraged by management’s decision to remain disciplined in such bidding processes. The current pipeline of projects and opportunities is particularly interesting, in that the majority are very well advanced and are less reliant on external tendering processes.

It is our understanding that the joint venture being discussed by Circle would likely be on a 50:50 basis, and Circle hopes to finalise terms in the near term. We see clear advantages in combining with an experienced partner as there is very little in the way of medical rehabilitation provision currently available in the UK. UK rehabilitation centres tend to focus on drug, alcohol or mental health, not usually integrated with mainstream acute hospitals. Hospital provision is mainly confined to serious neurological conditions. The NHS faces severe demand pressure for acute beds and the problem is often exacerbated by difficulties in discharging patients into suitable care. On average, 65% of all hospital beds are occupied by patients staying in hospital for more than seven days. Circle estimates that rehabilitation beds can be provided at a cost of £180 per night compared with an average cost of £320 per night for an acute bed. It estimates that there is a potential market for 120 rehabilitation facilities that could save around £12m pa on every 1,000 NHS beds.

The immediate focus will be on delivering a pilot facility in CircleReading (intended to open in early 2017) with a full scale facility to be incorporated in CircleBirmingham (to open in 2018), with further facilities to be rolled out nationwide.

Rehabilitation centres appear a particularly good fit with Circle’s MSK specialism, as high-quality physiotherapy enables patients to resume their normal lives sooner, and would be complementary to Circle’s hospital model in supporting the patient journey from acute care into post-acute care. An intended focus on category 2-3 cardiac, orthopaedic and neurology patients will allow Circle to leverage its existing expertise in these areas.

Circle’s early business planning suggests that annual revenue of £10-14m may be a reasonable target for each facility (not including the pilot facility) with set-up costs of c £1-2m and mature EBITDA margins of c 19% (see Exhibit 8 on page 13). As Circle is able to provide currently unutilised space at Reading we do not expect the pilot scheme to involve material expense. As a pilot, it will provide an opportunity to demonstrate proof of concept to a range of potential users/customers. Circle is in discussions with a number of NHS CCGs and anticipates procurement within six to 12 months. Similarly, for insurance companies there should be an advantage in getting patients fit and back to work as soon as possible. For self-pay patients with inadequate or unsuitable family or community support, this may provide an attractive option.

Circle has entered into a 50:50 joint venture with a Hong Kong-based private investment company called Deep Sea Capital. The joint venture will provide development and clinical management services in China under the name of Circle Harmony. No upfront financial investment is required of Circle and it will be reimbursed for the business development costs incurred before opening, estimated at £300-500k pa. Circle Harmony will receive an annual management fee of c £300k pa (Circle share £150k) and an annual profit share of 20% (Circle share 10%) once the first facility is in operation. The first facility in Shanghai is expected to be operational in late 2017 or early 2018. Circle Harmony has also received warrants entitling it to acquire up to 20% of the investor-backed company (Circle’s share 10%) that will build and own the facility, prior to any eventual listing. The investor group that has committed the equivalent of c £22m to this initial flagship Shanghai project includes a number of significant locally based companies, importantly including major insurers.

The Chinese market has obvious attractions of scale, demographic trends, social change and economic growth, and Circle has found an innovative way to address the market, supported by strong financial and clinical local partners. The state-run hospital sector enjoys a strong reputation and tends to attract the best doctors. There is also a shortage of GP services and, as a result, private patients often lack confidence that they will receive the best treatment. Already, 75% of Shanghai’s wealthy population pay for a medical test every year, and 12% do so every six months, but Circle believes there is a significant opportunity in the market to offer a more comprehensive and professional service. The private sector is also expected to meet an increasing share of healthcare needs. The latest government five-year plan anticipates increasing private healthcare provision tenfold.

Ahead of the joint venture, Circle has earlier this year entered into a clinical partnership with Ruijin Hospital, one of the country’s leading state hospitals. Circle believes this arrangement is unique and will allow patients of the new facility to receive primary healthcare, diagnostics, health screening and specialist outpatient consultations. The clinical partnership will provide priority access to specialists and secondary care facilities provided by Ruijin Hospital. A reciprocal arrangement allows Ruijin to access training and research opportunities in the UK, provided or facilitated through Circle.

Circle anticipates that the first integrated health clinic may generate annual revenues (excluding one-off membership fees) of c £25m (not dissimilar to an illustrative UK hub hospital, see page 13). One-off membership fees of c £10k per member are anticipated, with the membership numbers reaching c 5,000 per clinic. The steady state, recurring EBITDA margin is expected to be c 20% (or £5m of EBITDA on the expected recurring revenue of £25m). EBITDA break-even is expected within three years after £20m of set-up costs. Circle’s share of the management fees and profit share on this illustrative basis (excluding membership fee income) would be £0.65m, all of which would effectively fall to Circle’s bottom line. Circle has an intermediate target of c 10 clinics, which are expected to share similar financial metrics.

Circle plans to start construction on its fourth new-build hospital in Birmingham in late 2016, having won planning permission in 2015. It will be situated on the Pebble Mill site in Edgbaston, in the middle of a large population centre and a large potential market. The area has become a hub for medical and life science provision with a new dental hospital and school of dentistry planned, as well as a new purpose-built 62-ensuite bed care home for BUPA.

Financing arrangements for the third-party owned hospital building that will be constructed to Circle’s design have yet to be finalised. Circle expects to enter a 25-year lease at a rent cost of around £2.9-3.1m per year, a level that would be considerably less than that at CircleReading and a bit higher than at CircleBath.

The current plans allow for three operating theatres, 21 day beds and 21 inpatient beds with the potential to expand in future as demand dictates. However, we understand that Circle is considering how best it would integrate medical rehabilitation service into the project. We have included CircleBirmingham in our forecasts and valuation for the first time, forecasting ‘stabilised’ revenues of c £25m by 2021 and an EBITDA margin of c 10%, conservatively below management guidance of c 12%.

In the first six months of 2016 Circle made further progress towards the maturing of its existing operations. NHS referrals to the independent sector continued to increase in the period, while insured patient numbers continued to flatline ahead of a further increase (of 10%) in the insurance premium tax in October 2016. Self-pay patients are a growing but relatively small part of the market. The highlights of the period in brief were as follows (comparisons are with H115 unless otherwise stated):

We now look in more detail at the operations.

This segment comprises Circle’s operational management of the two independent hospitals in Bath and Reading and the NHS facility in Nottingham. Segment revenue grew 6.4% y-o-y in H116, and underlying EBITDA increased from £0.3m to £0.9m.

CircleNottingham grew revenues by 7% with patient volumes also up by 7%. Underlying EBITDA grew from £1.2m to £1.7m and would have increased further (to £2.4m) but for a refinement in the allocation of central expenses. Revenue growth was largely driven by increased orthopaedic volumes, while costs benefited from an increase in the proportion of directly hired consultants, with five recruited during H116. Revenues should benefit further from the expansion of the short stay unit with further growth in orthopaedics. Circle also hopes that changes in the local healthcare economy will bring new opportunities from which it hopes to benefit given the scale of its Nottingham operations, potentially including an expansion of its MSK offering (see Other Circle services below).

CircleBath revenues grew 8% on a 4% growth in patient volumes, increasing complexity of procedures and NHS growth. NHS patients now account for 59% of patient volumes versus 54% in H115. 14% more joint replacements were conducted than in the prior year period. EBITDA, having turned positive on an annual basis for the first time in 2015, was little changed year-on-year, held back by the mix shift towards NHS patients and an increase in agency staff costs. Bath is a relatively narrow medical employment market, making staff shortages more difficult to address; Circle has taken measures, emphasising the attractiveness of its offering and speeding up the recruitment process. It hopes to generate improvements by year end. An improved consultant fee structure was implemented at the beginning of H2, which should contribute to ongoing efficiency.

CircleReading revenues grew 3% with patient volumes up 5%. Like CircleBath, CircleReading benefited from increased NHS volumes and growth in joint replacement procedures. Unlike CircleBath, agency staff spend was reduced. The EBITDA loss continued to decline, reaching £1.0m from £1.2m in the prior year. CircleReading has added consultant capacity and management expects revenue growth to lead to higher gross margins, and to be at around EBITDA break-even next year. We estimate CircleReading will then move towards generating a 5% EBITDA margin in 2018 and a 10% EBITDA margin in subsequent years. In planning for CircleReading, management focused on lessons learned, keeping initial build costs low, while maintaining operational flexibility and targeting a sufficiently large local market into which to grow. Theatre utilisation is an area of opportunity for future profitability enhancement with a utilisation rate of 45% in 2015. A structural cost issue facing CircleReading is the relatively expensive lease, which at c £5m pa is roughly twice the level at CircleBath where the initial costs were renegotiated down.

For now, this business segment consists of the Bedfordshire MSK contract, but will also include Greenwich MSK from Q416 assuming successful contract completion. Traditionally, MSK care has been unco-ordinated and inefficient, with patients being seen first by their GP and then by one or more consultants before receiving a diagnosis for treatment, which often resulted in surgery when it was not always the most appropriate treatment. In managing the contract for the NHS, Circle seeks to profit from delivering better and quicker treatment for patients at lower cost to the NHS. It has created a triage hub that assesses patients at the beginning of their diagnosis stage and then passes them to the appropriate physician for treatment. A decline in the number of MSK referrals resulting in surgery, from around 21% in 2014 to just over 18% in 2015, appears to indicate success in identifying effective non-invasive and hence less costly therapies. The total value of Circle’s Bedfordshire contract is c £131m, based on a fixed annual capitated budget linked to national prices and spread equally over the five-year term of the contract. A capitated budget is one in which payment is made on a per-head basis irrespective of whether any of the covered population is known to have the relevant condition. The mature EBITDA margin is expected to be within the 5-10% range, lower than that targeted for the hospital contracts, but management indicates that the EBIT margins on both are similar.

In H116 Bedfordshire MSK revenues grew 6% and underlying EBITDA was £0.3m compared with £0.1m in the same period last year. The number of system-wide referrals (patients requiring diagnosis and/or treatment) was up quite strongly compared with last year, but more of the referrals are coming through the Circle triage hub (95%) providing it with greater control over the patient pathway, to provide more appropriate treatments and better manage treatment costs. Circle seeks further efficiencies from increased application of self-management “therapies” and non-surgical treatments and, encouragingly, an increased percentage of patients (82%) are now reporting positively on the beneficial impact of physiotherapy treatment.

Circle is currently preferred bidder to provide MSK services in Greenwich and finalisation of the contractual terms will be taking place over the coming weeks. Circle anticipates that the service will begin in Q416. The Greenwich MSK contract will replicate the Bedfordshire MSK model and build on the experience gained there. The total contract value is expected to be c £73.7m over five years and it is expected to save the Greenwich Care Commissioning Group £12.1m over the period. We have not yet included Greenwich MSK in our earnings forecast, but will do so on completion. We would anticipate a mature EBITDA contribution of between £0.75m and £1.5m.

Our revised estimates take account of both the full year 2015 and 2016 interim results. 2015 revenue growth of 15% was slightly (c 1%) ahead of our forecasts and profitability exceeded our estimates by a larger margin; gross profit was c 6% ahead of forecast and the EBITDA loss was lower by a similar magnitude. Our EBITDA loss is shown before non-cash employee share option costs (£2.7m), which are excluded from management’s commentary on underlying EBITDA (a smaller £4.9m loss). The bulk of the employee share option costs (c £2.5m) relate to Project Reset (see our outlook note published on 16 April 2015).

Our updated forecasts continue to look for the EBITDA loss to narrow through 2016 but at a slower pace than when we last published. We have introduced a 2017 and 2018 forecasts, which anticipates that the group will move into positive EBITDA in 2018 on management’s underlying EBITDA basis.

Management has also indicated that reported 2017 PBT will reflect a £4.9m write-down of the carried goodwill in respect of the current Nottingham contract as it moves towards maturity.

CircleBirmingham (mid-2018 planned opening) and the Chinese joint venture (first clinic planned to open in late 2017/early 2018) will have limited impact during the forecast period, and we will look to include Greenwich MSK as the contract is completed. As detailed above, we do not expect the Reading rehabilitation pilot to have a material impact and we will include estimates for the wider service roll-out as the timing and details become more certain. The Chinese joint venture requires no upfront financial investment from Circle, which will receive reimbursement of £300-500k pa business development costs.

Our forecasts indicate that the net cash balance at the end of this year should be held at a similar level to 2015 with a modest reduction in 2017, despite anticipated CircleBirmingham equipment capex. An improvement in operating cash flow should mirror the progress in EBITDA, while for 2016 we also allow for the expected sale of Circle’s Manchester property asset, which has been valued by management at around c £5m.

Looking beyond the forecast period, it is possible that Circle will need to utilise some cash resources to fund its proposed joint ventures in proton beam therapy and the roll-out of rehabilitation centres, but we are unable to quantify this and have not allowed for it in our forecasts. Management has indicated that Circle’s cash outflows for CircleBirmingham will mainly comprise commissioning costs and opening losses and will be around £3-5m in the first two years of opening, which is planned for mid-2018.

As Circle’s operations move towards profitability, we continue to assess the valuation on a discounted cash flow basis, capturing the net present value of expected future profit and cash generation. We are then able to contrast the market value of Circle with the fair value of existing operations and then include the potential that could flow from new initiatives, additional hospitals and service contracts.

Our estimate of the present value of Circle’s existing activities is 32p, significantly ahead of the current share price. For the first time this includes CircleBirmingham, adding c 8p to the overall valuation, effectively accounting for the increase from a previous fair value of 24p, although there are adjustments to the values of each assets, and the central costs, reflecting our most recent estimates and time value differences from rolling forwards to calculation since we last published.

There are some assumption changes for certain assets, shown in Exhibit 7, including reductions in the mature EBITDA margins assumptions on CircleBath and CircleNottingham from 12% to 10%, in line with illustrative guidance, somewhat offset by an extension of the medium-term growth period. For the other assets the changes are small.

Similar to our earnings analysis, this 32p includes nothing as yet from:

As discussed below, we believe there is significant potential upside to the valuation of existing activities from these initiatives.

We believe there are two main challenges that need to be overcome for this upside to be realised. The first is to demonstrate that the financial metrics for new operations set out in Exhibit 8 can be achieved in practice. The second is to maintain the improving earnings development so as to provide sufficient financial resources to support the targeted new developments.

Exhibit 6 below summarises our calculation of the current discounted cash flows (DCFs) from the existing activities and Exhibit 7 shows the key assumptions used. We have not deducted tax from the expected cash flows in view of the considerable deferred tax assets that Circle carries off balance sheet (a tax value of £30.5m at 31 December 2015). This value is not recognised in the financial statements due to the uncertainty over the timing of their potential use. However, a long-term stream of pre-tax earnings against which utilisation would be possible is implicit in the valuation analysis.

The leases for CircleBath, CircleReading and CircleBirmingham are due to expire in 2044, 2037 and 2042 respectively, but we believe it reasonable to assume a high probability that Circle will be able to renew the leases at expiry and continue operations beyond these dates, as the sites are unlikely to have attractively competing alternative uses. We have extended the period of cash flows captured in the valuation beyond these dates by including a terminal value based on 8x EBITDA for the final forecast year’s cash flow, as in our previous valuation work.

CircleNottingham is a five-year NHS contract expiring in 2018. Our valuation approach has been to calculate the present value of the current contract, and to then attach a probability of renewal for a further similar term, unchanged at 50%. We have applied a similar methodology to the Bedfordshire MSK contract, which is of similar duration. We note that assuming no contract renewals, the value for CircleNottingham would fall to £10.3m and that for Bedfordshire MSK to £3.9m.

In aggregate, we value the existing operations at £111.3m vs £87.1m previously. We have applied an unchanged discount rate of 10%, which is similar to the cost of equity calculation by Bloomberg for large healthcare operators. In our valuation we have deducted £35.4m for the capitalised value of the underlying (ex-Project Reset) central costs, which is based on the annualised value incurred, capitalised at 10%, and weighted at 50%. We continue to weight the central costs at 50% in our valuation on the basis that a large element of these is incurred in pursuing new business and not in running the existing activities. We note that a 100% weighting would reduce the existing business value to £44.7m or 18p per share.

The valuation of future contracts can be highly subjective, depending crucially on the specific scale, nature and contract terms, as well, of course, as their successful launch. However, we have discussed above a number of quite advanced plans for which Circle has given more specific details and guidance, in addition to more generic illustrations for incremental hub hospitals, service line contracts and rehabilitation centres.

Exhibit 8 shows the illustrative characteristics of potential new contracts of differing types, as well as our indication of potential fair value that each may be able to generate, incremental to our valuation of the existing operations above. We note that CircleBirmingham, included at an 8p NPV in our existing operations value of 41p for now falls towards the bottom of the indicative range of 8-12p for additional hub hospitals, which will in part reflect its size (we assume mature revenues of £25m) and the fact that it will not commence operations until H118. Each illustration is based on DCF, using a 10% discount rate.

The £8.6m valuation of the Bedfordshire MSK contract within the existing operations value is equivalent to c 3.5p per share. Our preliminary value of the slightly smaller Greenwich MSK contract is £6.0m or c 2.4p per share, assuming a 50% probability of renewal for a further five-year period on similar terms. Additional MSK or similar service contracts could add another 2-4p to the value according to this illustration.

Using the same illustrative framework, we estimate that each fully operational rehabilitation centre may add a further c 3p of value.

In Exhibit 9 we show the financial illustrations provided by Circle for the Chinese JV, Circle Harmony. As noted above, no upfront investment is required by Circle and its expenses are to be reimbursed until the first clinic opens, expected in late 2017/early 2018. The top part of Exhibit 9 illustrates the financial metrics for the clinics to be managed by Circle Harmony. The lower part shows the benefit to Circle from its 50% share in Circle Harmony. The structure will see Circle’s share of the management fees and profit share drop straight to the bottom line. The illustrated revenue of £650k for the first clinic represents Circle’s 50% share of the annual (£300k) and its profit share of 10% on the illustrated mature EBITDA of £5.0m. Circle estimates that break-even for the facilities can be achieved within three years. If these metrics are achieved it is equivalent to c 0.26p per share (assuming no tax) per facility at a mature run rate. Attaching an 8x EBITDA multiple, similar to that used in our terminal valuation for the other Circle facilities, implies a mature value of 2p, or a potential 20p for the 10 facilities planned for the medium term. We have not attempted at this stage to put a value on Circle’s 10% entitlement to equity in the clinical operating company in a future listing. A successful roll-out of the Circle Harmony JV alone has the potential to substantially lift Circle’s value.

On 30 November Circle announced a change in management with Paolo Pieri taking over as CEO at the beginning of December from Steve Melton who had joined the company in 2008, initially as COO and then as CEO. Pieri was previously Circle’s CFO, leading the company’s finance, legal and investor relations functions for six years. He has been involved in the development of the new growth areas the group is pursuing, including rehabilitation centres and MSK services. As such we expect continuity in strategy. The board has appointed Sarah Marston, currently head of finance operations, as interim CFO; she has more than 15 years’ experience in the healthcare sector including financial and operational roles. The board as a whole has a range of skills in medical care, finance and property. Its chairman, Michael Kirkwood, is a senior banker from Citigroup and Circle’s CEO, Paolo Pieri, has experience at lastminute.com and Virgin Megastores. The chief medical officer, Dr Massoud Fouladi, is a co-founder of Circle and had the original vision of a clinically-led company delivering superior services to patients. He remains an active consultant specialising in ophthalmic surgery. In addition, there are four non-executive directors with experience in property (Chesterton International), finance (Rolls-Royce), healthcare and investment banking (Goldman Sachs).

Circle’s profitability and continued growth is dependent on a number of factors. The most important of these are as follows.