Japara Healthcare Adds Beds And Earnings Upside

This story features REGIS HEALTHCARE LIMITED. For more info SHARE ANALYSIS: REG

-Refurbishment needed
-But quality will improve
-Highly accretive due to RADs
 

By Eva Brocklehurst

Japara Healthcare ((JHC)) has expanded into regional Queensland for the first time, taking a further step in its strategy of gaining a foothold nationally. The company has acquired the Profke portfolio of aged care facilities in the favourable demographics of southern Queensland and northern NSW for $79.5m.

Macquarie notes the outlay is consistent with the price the company paid for the Whelan acquisition, although some facilities do require refurbishments which will reduce bed numbers by 62 from the 587 acquired. This pushes up the price up to $152,000 per bed from the $135,000 per bed implied in the acquisition price, ex refundable accommodation deposit (RAD) liabilities.

Although acquisition prices have tracked upwards in recent years and returns on capital are not hugely exciting, transactions such as this are highly accretive because of the funding derived from RADs, Macquarie believes. As the company is likely to benefit from these inflows for some time it is probable there will be more highly accretive acquisitions to come.

Accounting for the reduction in bed count, an expected $10m uplift expected to come from RADs as the portion of bond-paying residents increases, as well as assuming the new earnings per place reach Japara's average, Macquarie calculates a pre-tax return on invested capital of 12.7%. Earnings estimates are raised by 6.8% for FY16 and by 13.1% for FY17.

Once the acquisition is fully integrated Deutsche Bank expects a 17% boost to earnings. Nevertheless, the broker is cautious about the returns generated, given the required investment to refurbish the Queensland facilities and the relatively modest additional RAD uplift. The broker lifts earnings forecasts by 3.0% for FY16 and 4.0% for FY17.

Morgan Stanley is confident earnings from the facilities will grow, even while operating places are reduced as a result of the conversion of some double rooms to single rooms as occupancy was historically low in these rooms. Attracting higher daily payments from better quality facilities will deliver an improved earnings profile, the broker maintains.

A mixture of cash and debt is assumed for funding the acquisition but Morgan Stanley expects any debt will be paid off by June 2016 from the net inflows coming from RADs in the established business.

The Profke portfolio, with facilities are in Noosa, Gympie, Coffs Harbour and South West Rocks, generated earnings of $8.7m with the potential to rise to $9.5m over the next 18 months, according to management's forecasts.

Morgans increases Japara's profit forecasts by 2.8% for FY16 and 10.9% for FY17 as a result of the acquisition. The broker maintains a strong view on the aged care sector, noting a need to find a further 74,000 beds nationally by 2022.

Morgans upgrades its rating on Japara to Add from Hold and the target to $3.06 from $2.78. Japara now has 3,976 aged care beds and 180 independent living units across 43 facilities.

The broker compares this with another listed operator in the same market, Regis Healthcare ((REG)), which has 5,049 beds. Morgans covers that stock with a Hold rating and $6.00 target.

Separately, Japara Healthcare has also purchased a site in Mt Waverley, Victoria, for $6m. The land is to be the location of a new 105 bed facility, with settlement expected in February 2016.

There are three Buy ratings and one Hold for Japara Healthcare on the FNArena database. The consensus target is $3.14, suggesting 4.0% upside to the last share price. Targets range from $2.90 (Deutsche Bank) to $3.50 (Macquarie). The dividend yield on FY16 estimates is 4.0% and on FY17 estimates it rises to 4.6%.
 

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