Sonic Healthcare Limited

SHL Details

Fund Raise of US$550 Million: Sonic Healthcare Limited (ASX: SHL) is one of the world’s leading medical diagnostics companies, which provides laboratory and radiology services to medical practitioners, hospitals, community health services and their collective patients. The market capitalisation of the company stood at A$13.55 Bn as on 1^st November 2019. In a recent release, the company announced that it would be conducting its 2019 Annual General Meeting on 19^th November 2019. In another update, the company announced that it has priced US$550 Mn of notes in the United States private placement market. However, the closing of the transaction is anticipated in January 2020, post completion of the final investor due diligence and documentation. When it comes to tenor, US$300 million of the notes would be having a 10-year tenor, US$150 million a 12-year tenor, and US$100 million would have a 15-year tenor, significantly lengthening the company’s debt maturity profile. The weighted average fixed coupon for the notes stood at 3.07%.

The following picture provides an idea of performance for the financial year 2019:

Financial Summary (Source: Company Reports)

What to Expect:The company is well placed to continue the strong growth and has a rich pipeline of acquisition, joint venture and contract opportunities. It added that the geographical diversification provides growth opportunities and risk mitigation.

Stock Recommendation:The company possesses a strong balance sheet with headroom for expansion. Coming to valuations, the stock has EV to EBITDA multiple of 14.3x in comparison to the industry median of 9.8x on TTM basis. As per the ASX, the stock of SHL is trading at a price to earnings multiple of 23.67x against the industry median of 14.4x on TTM basis. Thus, it can be said that the stock of SHL is trading at stretched valuation.  Also, the company is trading towards its 52 -week high of A$29.930. Therefore, considering SHL’s stretched valuations and current trading levels, we recommend an “Expensive” rating on the stock at the current market price of A$28.990 per share, up 1.577% on 1^st November 2019.

 
SHL Daily Technical Chart (Source: Thomson Reuters)
 
 

Japara Healthcare Limited

JHC Details

A Look at Royal Commission Consideration:Japara Healthcare Limited (ASX: JHC) is the owner, operator and developer of residential aged care homes. It has a market capitalisation of A$299.32 Mn as on 1^st November 2019. Recently, the company has conducted its 2019 Annual General Meeting on 25^th October 2019, wherein, Chairman of the company addressed the shareholders and stated that FY19 has been eventful and challenging for the company and the aged care sector at large with continuing great focus on ensuring quality care for all its residents.

The Chairman further added that the Royal Commission into Aged Care Quality and Safety formally commenced during the year and has been, and continues to be, a major focus for the company and the aged care sector.The Royal Commission has wide ranging terms of reference with several hearings, visits and community forums being held throughout Australia to gather evidence and receive feedback as part of a thorough review of home and residential care. It was added that some of the topics covered till 25^th October 2019 include the provision of care, access to services, diversity, younger people in care and the workforce. The following picture depicts an idea of EBITDA bridge for FY19:


FY19 EBITDA Bridge (Source: Company Reports)

Future Guidance:For FY20, the company anticipates EBITDA to be 5% to 10%, lower than FY19 primarily due to removal of the Federal Government’s temporary subsidy increase which was applied from 20 March 2019 to 30 June 2019 and as funding environment has been presenting challenges and the occupancy remains below the historic levels.

Stock Recommendation:The company continues to focus on the delivery of its development program with more than 300 net new places anticipated to be opened in FY20 after the completion of existing greenfield and brownfield projects. On the valuation front, the stock has EV to sales multiple of 1.2x as compared to the industry median 10.0x on TTM basis. The stock is trading at a price to cash flow multiple of 8.6x in comparison to the industry median of 9.0x on TTM basis. The net margin of the company stood at 4.2% in FY19 as compared to the industry median of 3.6%. This implies that the company has better capabilities to convert its top-line into the bottom-line against the broader industry. When it comes to the past performance, it generated returns of 6.67% in the time period of three months. Therefore, considering JHC’s focus on delivering its development program, better capabilities to convert its topline into the bottom line, comfortable valuations, etc., we give a “Speculative Buy” recommendation on the stock at the current market price of A$1.190 per share, up 6.25% on 1^st November 2019.

 
JHC Daily Technical Chart (Source: Thomson Reuters)
 

Estia Health Limited

EHE Details

Notice of 2019 AGM:Estia Health Limited (ASX: EHE) is into the provisioning of services in residential aged care homes in Australia and has a market capitalisation of A$733.66 Mn as on 1^st November 2019. The company would be conducting its 2019 Annual General Meeting on 6^th November 2019. The company, in its annual results report stated that the sector has been responding towards the Royal Commission into Aged Care Quality and Safety. The company further added that it is well prepared for the introduction of the new quality standards, with additional investment in quality management and resident care systems, including staff education, technology development, customer engagement and service. The following picture depicts an idea of the key numbers for FY19:


P&L Summary (Source: Company Reports)

Future Aspects:The company expects EBITDA on mature homes, based on pre-leasing standard changes to be between $86 Mn - $90 Mn, excluding the EBITDA impact of the new homes at Southport, and Maroochydore and excluding the impact of any further direct costs associated with the Royal Commission. The company anticipates capital investment in the range of $120Mn - $150Mn for FY20.

Stock Recommendation:The company stated that aged care sector continues to have strong underlying thematics, which are required to be supported by a strong and consistent policy environment. On the valuation front, the stock has EV to EBITDA multiple of 9.1x in comparison to the industry average of 8.1x on TTM basis. As per the ASX, the stock of EHE is trading at a price to earnings multiple of 18.24x against the industry average 13.7x on TTM basis. The stock of EHE is trading closer to its 52-week high of $2.990. Considering the current trading levels and valuations along with above mentioned factors, we have a watch stance on the stock at the current market price of A$2.890 per share, up 2.847% on 1^st November 2019 and suggest investors to wait for better entry levels.

 
EHE Daily Technical Chart (Source: Thomson Reuters)

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