Australia | Sep 11 2006
By Chris Shaw
Takeover time is in full swing on the Australian share market, with DCA Group (DVC) the latest potential acquisition target after its shares rose by around 17% on Friday following management’s revelation it had been approached by parties interested in acquiring the company.
To date no bid has been made and it appears any bid would have to be friendly and so have the approval of the board, meaning it must be pitched at a reasonable price. With this framework in place brokers have attempted to estimate what a fair price might be and whether further analysis would indicate to a prospective buyer there is value in the group.
The results of this analysis are mixed, as the FN Arena database shows the stock is rated as Hold five times and Underperform twice, with an average target of $2.72. This is slightly misleading though as ABN Amro’s target has been increased to $3.15 from $2.35 to reflect a possible bid, so without this change the current target price would be more like $2.60. This compares to the current share price of $3.10, suggesting its estimate of what a potential buyer might pay is reasonably close to the mark.
But will someone pay this much for the company? Again, it depends on whether you believe additional value can be extracted from new owners. Macquarie says no, as in its view the company has not been particularly poorly managed nor is its capital structure particularly poor, so there appears a limit to what another buyer could achieve.
JP Morgan agrees, as it calculates a private equity player would struggle to justify a price in excess of $3.00 per share if the requirement was an internal rate of return of at least 15%. The exception would be if the acquirer had its own portfolio of aged care assets, as this could facilitate the creation of a separate trust for the aged care assets down the track.
Further, the broker suggests there is little attraction to the group currently given the outlook is for moderate earnings growth, the broker forecasting earnings per share of 18.1c this year and 19.6c in FY08. This compares to median estimates according to Thomson One Analytics of 17c and 19c.
At the same time, it cautions the risk is to the downside given the company’s market share in radiology is under pressure at the same time as margins are feeling the pinch from rising wage costs in both the radiology and aged care divisions.
Credit Suisse has a Neutral rating on the company but is slightly more positive with respect to possible takeover valuations, estimating a range of $2.90-$3.66 is possible. It takes the view there is upside to margins in radiology if management can align the interest of the radiologists with that of the company, but improvements in returns from the aged care assets will require changes to government regulations for the industry and this won’t be a short-term fix.
This may not be simple if ownership changes though, as Macquarie makes the point the cash flows from the division are generated by the radiologists and not by the company. This means if an ownership change meant the loss of some radiologists, that would also mean the loss of the cash flow contributions they make.
ABN Amro also points to the potential for cuts to corporate costs and margin improvement, but agrees such margin improvement is unlikely in the short-term given the competitive pressures in radiology in particular. Macquarie also points out a private equity player would find it difficult to follow the usual process of increasing the level of gearing on assets, as this is already quite high and so offers little room to move.
Given the tough medium-term outlook for the company in terms of margins and regulations the view of the broker’s is best summed up by Macquarie, which in moving to an Underweight rating suggests holders look to sell into any offer or into the market if no offer emerges. This echoes the JP Morgan view, the broker suggesting the share price risk is to the downside from current levels.
DCA Group shares today have moved against a weaker overall market, as at 11.15am the stock was 3c higher at $3.11.