Questions Over Regis Healthcare’s Acquisition

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

-Surplus land an advantage
-Modest, immediate earnings boost
-Quality assets in prime locations
 

By Eva Brocklehurst

Aged care provider Regis Healthcare ((REG)) has sparked a few surprised reactions over its decision to acquire the Masonic Care assets in Queensland. The net price is $163m, excluding a residential accommodation deposit (RAD) liability of $50m.

Deutsche Bank finds the decision to pay a high price for the Masonic Care portfolio incongruous, given management has a stated preference for development options. Nevertheless, most brokers consider the price, albeit full, can be largely justified by what the acquisition entails.

Deutsche Bank also acknowledges there is a favourable overlap with current operations and the potential to expand the acquired portfolio by 50%, but cannot justify the high price given limited detail on development plans and modelling that suggests the valuation benefit is minimal.

The broker calculates the deal should generate a low double digit return but makes no allowance for the potential boost from development. That said, Deutsche Bank assumes development programs will continue in the medium term and this is partly captured in its multi-stage discounted cash flow valuation.

The portfolio has 711 beds and 244 independent living units and comes with a land bank that has potential to add 385 beds and 210 independent living units.The six facilities exist across four locations, in Brisbane, Cairns, Townsville and Tin Can Bay.

UBS believes the price is high versus industry average transactions over the past 12 months but reflects an immediate earnings contribution. Nevertheless, the acquisition does absorb most of the company's medium-term growth capacity, the broker observes, and will dilute earnings per bed for the company.

Given Regis Healthcare is priced for growth, UBS is inclined to a Neutral rating. The broker increases estimates by 2.3% for FY17 and by 4.9% for FY18 and notes the stock now trades on the highest multiple with the lowest growth outlook among its listed peers.

Macquarie likes the quality of the assets and justifies the purchase price on this basis, plus taking into account the current level of competition in the market. Given the quality of the facilities, the broker estimates the company should generate at least its current level of earnings per place, which would equate to a return around 15%.

There are some aspects to the acquisition Morgans likes as well, including the fact that 99% of rooms are single and occupancy is at 98%, although there is little opportunity for these percentages to improve. Earnings are below the average of other facilities in the company's portfolio so upside potential exists. The broker also acknowledges on the plus side that capital city portfolios are more valuable and the acquisition includes surplus land for development.

Management has guided to $10-12m in additional earnings in FY17. An estimated $5m in capital expenditure is required. Morgans is of the view that the company's track record in development and execution should stand it in good stead and, given the recent share price weakness, moves back to Add from Hold.

FNArena's database shows three Buy ratings and one Hold (UBS). The consensus target is $5.93, suggesting 10.2% upside to the last share price. Targets range from $5.50 to $6.30.

See also, Regis Healthcare Ramping Up Developments on March 2 2016.
 

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