Estia Health Ltd

Slight rise in occupancy expected for second half:Estia Health Ltd (ASX: EHE) has recently clarified that it noted about an investor update from Sentinel Portfolio Management (having a 4.99% stake in EHE) disclosing a planned takeover proposal for EHE. However, EHE denied of any discussion with Sentinel concerning any takeover proposal. The group’s H1FY17 revenue grew by 5% to $263 million over H2FY16 while reporting EBITDA was of the order of $43 million and the group is on track to achieve full year EBITDA guidance of $86 - $90 million. Further, EHE has raised capital of $136.8 million by non-renounceable entitlement offer of 1 new share for every 3 existing shares at an offer price of $2.10, which allowed it to reduce net debt to $140.1 million and strengthened its balance sheet.  The company’s initiatives including a new leadership team and management structure to optimize the performance of existing portfolio of assets and sustainable earnings growth seem to be fructifying. In the near-term, the group is focusing on business improvement and delivering on the opportunities by identified non-wage cost savings including procurement optimization, disposing non-core assets, delivery of significant refurbishments, greenfield and brownfield developments, and revenue improvement opportunities. Further, construction of 628 places is expected to commence from FY18. For FY17, occupancy is expected to rise slightly from 93.5% in H1FY17 to 93.9% in H2FY17while full year target is to achieve 93.4%. Reduction in ACFI rates from Government funding changes effective 1 January 2017 is thought to be offset by higher revenue from additional services, improved occupancy rates and cost management. However, EHE stock declined by 45.2% over the past one year (as at April 26, 2017) on account of subdued results coupled with changing regulations on services that might impact the margin pressure going forward. Fundamentals on Return on Equity also seem to be below the average industry. The challenging business environment might still limit the upside in the stock, and we believe that the stock is “Expensive” at the current market price of $ 3.01

Japara Healthcare Ltd

Stronger H2FY17 expected with ongoing brownfield developments:Japara Healthcare Ltd (ASX: JHC) witnessed a total revenue growth of 14.5% year on year (yoy) to $178.5 million while EBITDA grew by 3.6% yoy to $29.1 million. However, it has witnessed a decline of 9.9% yoy in net profit after tax to $14.6 million, impacted by Profke portfolio due to occupancy issues. JHC reported an overall average occupancy at 94.4% while focusing on high quality resident care and innovation in service delivery.  Further, the company’ projects are progressing well and the group has delivered four brownfield facilities during H1FY17 and four additional land sites secured in optimal metropolitan locations. With this, land has been secured for 10 of 11 greenfield projects which are targeted to provide over 1,100 places by FY20 to cater to the growing demand from Australia’s ageing population. Apart from this, company is commencing a $15 million refurbishment program and upgrading 13 facilities over the next two years, which is expected to provide progressive EBITDA uplift more than $4 million. While EBITDA is expected to grow at 7%-10% for FY17, JHC continues to generate strong net operating cash flows of $37.4 million.
 
 
Integrated Strategy (Source: Company Reports)
 
The stock plunged about 29% over the past one year (as at April 26, 2017) on account of the new regulations despite strong outlook for H2FY17. There might be some improvement owing to demand scenario; however, JHC is not looked as a fast-growing group given the fundamentals and erupting concerns on Aged Care Funding Instruments related changes. We give an “Expensive” recommendation at current market price of $ 2.04

Regis Healthcare Ltd

Masonic Care Queensland acquisition: Regis Healthcare Ltd (ASX: REG) is focusing on its medium-term growth strategy that continues to combine organic growth, including greenfield and brownfield development, with acquisitions of single facilities and portfolios. The program of greenfield developments has continued to progress, with the recent opening of the East Malvern, VIC Facility, which contributed 148 net new places. As on 31 December 2016, 1,404 new places were reported in the expansion pipeline and eight developments under construction. A significant milestone for the company was the Masonic Care Queensland acquisition. Integration activities with high quality portfolio of 711 new places have progressed well and the transaction has been EPS accretive in 1H FY17. In H1FY17, REG reported a robust revenue growth of 20% year on year (yoy) to $284.7 million led by increase in revenue per occupied bed day of $281 against $271 in H1FY16. EBITDA and NPAT grew by 20% and 8% yoy to $61.8 million and $30.9 million, respectively. The company stated that Q2FY17 EBITDA is expected to be in line with the H1FY17 and to be 15% more than FY16. REG reaffirmed that debt will remain at approximately 2x EBITDA in FY17 while the total capex spend is anticipated to be ~$160m. On the other hand, Regis has highlighted that the changes to aged-care funding by federal government will become more significant to the group in FY18 and FY19 while there seems to be minimal impact in 2H FY17. The stock declined by 16.2% over the past one year (as at April 26, 2017) due to low growth in EBITDA impacted by local regulations. We give an “Expensive” recommendation on the stock at current market price of $ 4.45

Ramsay Health Care Ltd

Australian business continues to witness robust growth: Ramsay Health Care Ltd (ASX: RHC) reported a muted revenue growth of 3.5% yoy at $4.3 billion while witnessing moderate growth of 8.8% yoy in EBIT at $463.5 million for half year ended December 31, 2016. Geography-wise, Australian, U.K and France revenue grew by 8.8%, 6.8%, 6.1% (in constant currency terms), respectively. Net Profit After Tax (Core NPAT) grew by 12.8% yoy to $267.8, primarily led by growth in Australian business operating profits at $348.1 million.  Moreover, company’s global procurement strategy to deliver substantial savings in supply costs after securing improved commercial terms with major international supply companies are giving better results. Well-diversified Australian business continues to witness robust growth in-patient admissions during the same period, which reinforces the ongoing brownfield investments. In international markets, UK and France experienced strong volume growth. Further, global demand for healthcare is expected to be driven by an ageing and growing population, clinical innovation and increasing consumer expectations. Company’s geographical mix, public/private payer mix, ability to negotiate appropriate funding outcomes and the successful delivery of global procurement strategy are estimated to deliver over $40 million of savings over FY17. RHC stock moved by 10.2% over the past one year while it was down 5.4% over last six months (as at April 26, 2017). Given the performance so far and increasing patient admissions, Ramsay has upgraded guidance of Core NPAT and Core EPS growth to 12% to 14% for full FY 2017 form previously stated 10% to 12%. Meanwhile, RHC has appointed its Chief Operating Officer, Craig McNally, as the Company’s new Managing Director and Chief Executive Officer, effective from 03 July 2017. Given the scenario and trading conditions, we give a “Hold” recommendation on the stock at current market price of $ 71.02

Healthscope Ltd

Noteworthy progress at Northern Beaches Hospital: For H1FY17, Healthscope Ltd (ASX: HSO) group revenue grew by 3.9% yoy to $1.19 billion while operating EBITDA was up by 5.1% to $216.8 million. However, operating NPAT declined by 4.2% yoy to $96.1 million due to muted growth in hospitals operating income at 2.2% yoy growth at $186.7 million despite its contribution at 81% to group EBITDA. Notably, New Zealand Pathology operating EBITDA growth was of the order of 31.5% to $30.5 million, despite continuing volatility, driven by better revenues from non-government community pathology and greater penetration of the veterinary market. Healthscope’s pathology operations in Singapore and Malaysia and medical center operations in Australia collectively contributed 6% to group operating EBITDA, however strong earnings growth in Singapore and Malaysia was offset by a decline in medical centre earnings. Operating cash flow increased to $224.5 million against $179.4 million in H1FY16, which represents an operating EBITDA to cash flow conversion ratio of 103.5%, while net debt increased by $150.5 million over the period to $1,432.6 million primarily as a result of the Northern Beaches Hospital development program. 

Construction Pipeline (Source: Company Reports)
 
Moreover, HSO made an excellent progress at Northern Beaches Hospital with construction of the external physical structure completed in December 2016, which was three months ahead of schedule. The Northern Beaches Hospital is partnering with the NSW Government to deliver high quality care to residents in the northern coastal suburbs of Sydney. HSO stock price plunged by 19.6% over the past one year (as on April 26, 2017) despite better performance and outlook on account of slow growth in hospital sales. We expect the stock to rebound back given ongoing projects contribution to H2FY17 results and increased hospital capacity (stock price recovered over 0.9% in last one month). Gordon Ballantyne has recently been appointed the group’s new managing director and chief executive. We give “Buy” recommendation on the stock at current market price of $ 2.22

Sonic Healthcare Ltd

Recent acquisitions to drive revenue and margin expansion: Sonic Healthcare Ltd (ASX: SHL) reported a moderate revenue and EBITDA growth of 5%, 6% yoy at $2.57 billion, $ 431 million, respectively (on constant currency basis), while posted statutory net profit of $197 million. Australian operations were impacted by Government policies, despite strong operating performances in Germany and Switzerland led by strong organic revenue growth and cost management that contributed to strong cash conversion.Sonic has recently announced highly synergistic laboratory acquisitions in both Germany and the USA, which will significantly enhance group earnings going forward. 

Revenue mix (Source: Company Reports)
 
Further, the partnering with hospital systems in the USA for laboratory services is gaining momentum as more than half of the total laboratory market in the USA is representing a significant growth opportunity for SHL. SHL has also entered into a binding agreement to acquire Medical Laboratory Bremen and the transaction is expected to be accretive to Sonic´s earnings per share (EPS) from FY18. SHC stock price has moved up by 11.8% over the past one year (as at April 26, 2017) and currently trading at a slightly higher level. The group has also highlighted about increased expenses in FY17. There may be headwinds owing to German reforms and US Medicare cuts.We give an “Expensive” recommendation on the stock at current market price of $ 22.01

SomnoMed Ltd

Downgraded full year earnings: SomnoMed Ltd (ASX: SOM) witnessed a share price fall of about 7.5% on April 27, 2017 at the back of a soft quarterly update. SOM has downgraded its full year earnings guidance (loss of $1.5 million from earlier ‘break-even’ guidance) owing to sales that have been below the expectations in the United States. However, the group’s year-to-date revenues are up 8%. In the first half 2016/2017, the group’s global MAS sales volumes were up 14.9% while group revenues surged 11.5%; and the group expected a drive from aging population and increasing obesity for the incidence of obstructive sleep apnea. The stock has fallen 18.5% in last six months (as at April 26, 2017) given the softness in the outlook and some prevailing volatile conditions. On the other hand, faster roll-out of RSS treatment centres, better growth in core business, strong sales expected in Europe, might boost performance in 2017/2018. We give a “Hold” recommendation at the current price of $ 2.97

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