Treasure Chest | Dec 03 2013
By Greg Peel
In December 2012, Vision Eye Group ((VEI)) was forced to raise fresh capital in order to pay off debt and to change its approach to business growth. Those investors choosing to participate in the raising have fared very well, with VEI shares doubling in price to September before a consolidation at around the 70c mark.
Vision Eye operates a familiar model in the listed healthcare space, in this case grouping together ophthalmology professionals and day surgery assets. Following a period of consolidation and planning, Vision Group is now likely to be looking to further expansion, suggests Bell Potter, and this may affect a valuation re-rating down the track. Despite the 2013 share price rally, VEI trades at a significant discount to other healthcare and specialised professional services groups, the broker notes.
In the near term, however, the company’s change of approach will translate into subdued earnings growth in Bell Potter’s view.
Previously Vision operated a model based on paying large upfront earnings multiples for practice acquisitions. The problem is the company soon ran into trouble with the bank as it struggled to meet debt servicing obligations. The bank said no more, and Vision had to go to the market cap in hand. The company needs to ensure it retains those earlier referrals, says Bell Potter, but should also look to increasing the utilisation of existing day surgery assets.
The broker feels there is limited organic growth potential offered by existing doctor partners. Many of the highest paid professionals are approaching retirement age and a different approach is needed. Growth is more likely to come from the acquisition of bolt-on assets, such as further day surgeries, together with the recruitment of more home grown ophthalmological specialists that can grow their own businesses within the Group, the broker suggests.
Vision’s balance sheet now boasts low levels of debt and earnings are stable. The opportunity provided by a new approach to growth could well lead to a future re-rating but for now earnings will remain subdued until such a strategy begins to pay off. On this basis the broker has downgraded its rating on VEI to Neutral from Buy and cut its target to 76c from $1.00, with forecast earnings falling 4% and 14% in FY14-15.
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