Healthscope Limited

Acquisition Update with BGH and Brookfield Capital:HealthscopeLimited (ASX: HSO) is into healthcare business. It is one of the leading healthcare providers in Australia. It has 43 hospitals and market leading international pathology operation in New Zealand. Recently, the group has gotten correspondence from BGH Capital Pty Ltd on behalf of the consortium of financial investors including the BGH-AustralianSuper Consortium. As per the release, the Consortium has demonstrated that it can initiate due diligence on an immediate basis in relation to its revised preliminary, non-binding proposal to acquire, for cash, all of the issued and to be issued shares in Healthscope for $2.36 per share which was announced on 23 October 2018 by Healthscope. Further, the management of the group stated that they will consider correspondence and will keep update to the market if any material development happens. Besides this, the company has another proposal from Brookfield Capital Partners Ltd to acquire 100% of HSO by way of either Scheme of Arrangement or Off-market takeover. The takeover arrangement represents the total value of $2.455 per share, signifying ~10.1% premium to December 31, 2018 close. While the scheme of Arrangement represents a total value of $2.585 per share, showing a premium of 15.9% on the closing price of December 31, 2018. In our view, Brookfield offers an attractive proposal to the shareholder of HSO and it was granted while the proposal with BGH is in progress wherein HSO expects to enhance certainty on the proposal.

FY18 was a transition year as the group was mainly involved to reset the business on all front for future growth purpose.However, the group has recorded decent performance in FY18 and recorded revenue of $2,340.8 Mn, an increase of 3.7% over the previous year. It was mainly driven by completed brownfield developments, which continues to provide confidence that capital is being invested in the right catchments. The operating EBIT from continuing operations saw a 7.8% decline and stood at of $265.9 million which was driven by lower operating EBITDA and an increase in depreciation and amortisation associated driven by the hospital expansion program. NPAT down by 10.3% to $151.2 Mn in FY18 over the prior year because of high non-operating expenses. On the analysis front, the company has a price-to-earnings ratio of 41.73x and has posted a return on equity (RoE) ratio of 3.2 per cent, return on invested capital (RoIC) of 1.9 per cent and has a debt-to-equity ratio of 0.82x and has account receivable turnover ratio of ~6.6x which is broadly is in-line with the industry median of 5.1x.


FY18 Financial Highlights (Source: Company Reports)

In our view, the financial position remains good, and the company is poised to grow in FY 2019, with the strategic capital investment in the business to expand the hospital portfolio, successful execution on the Group's hospital expansion program in FY18, and strong industry fundamentals. Meanwhile, the stock has risen 3.33% in the past three months as at December 28, 2018 and is trading close to higher level. With scope for growth and expect to proceed better deal for its shareholders either with Brookfield capital or BGH capital, we maintain our “Hold” recommendation on the stock at the current market price of $2.230 (up 2.765% on December 31, 2018).  
 

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