Part Two Of Sale Process Could Be Catalyst For Primary Healthcare

Array
(
    [0] => Array
        (
            [0] => ((PRY))
            [1] => ((SHL))
        )

    [1] => Array
        (
            [0] => PRY
            [1] => SHL
        )

)

This story features SONIC HEALTHCARE LIMITED.
For more info SHARE ANALYSIS: SHL
The company is included in ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Chris Shaw

For some time the market has been awaiting the outcome of Primary Health Care’s ((PRY)) plans to reduce debt following its acquisition of Symbion by selling one or more likely both of its consumer and pharmacy businesses and yesterday the company announced stage one of the process has been completed.

The group has sold its consumer business to Sanofi-Aventis for $560 million, a price that was above most estimates in the market.

The proceeds will be used to reduce debt and given the solid price for the sale ABN Amro suggests the total sale of both businesses for around epectations of $960 million looks quite achievable given the necessary $400 million in proceeds from the pharmacy division implies a prospective EV/EBITDA (enterprise value to earnings before interest, tax, depreciation and amortisation) multiple of only 5.5 times when multiples for similar sales have been at more than 11 times.

The sale also improves sentiment surrounding the stock in Macquarie’s view as it takes some of the pressure off with respect to not only meeting sales expectations but simply getting one of the transactions out of the way. It also allows the company to reduce gearing, which is important as it is required to repay a $780 million debt facility on the sale of both assets or by March 12 next year. This suggests while there is scope for the company to keep the pharmacy assets a sale remains the most likely outcome.

Assuming the sale proceeds the reduction in group debt is likely to act as a catalyst for the stock, suggests ABN Amro. The broker points out that if the $960 million is achieved for the two transactions group EBIT/interest cover would then be a far comfortable 2.9 times.

Another attraction of the group assuming debt levels come down is the synergy benefits to be extracted from the Symbion takeover, which Macquarie suggests offers the potential for upside in the key divisions of medical centres, pathology and radiology.

As well, Merrill Lynch points out the stock is simply cheap relative to its peers, as by assuming total asset sale proceeds come in at $950 million the company would be trading on a P/E (price to earnings) ratio of 10.1 times compard to the All Industrials at around 12 times and competitor Sonic Healthcare ((SHL)) at around 17 times.

As a result the broker retains its Buy rating on the stock, while the FNArena database shows a total of six Buys and two Holds and one Reduce recommendation. Citi is one of those with a Hold rating given there remains execution risk with respect to not only the possible pharmacy sale but the achieving of expected synergies from the Symbion purchase.

The average price target according to the database is $7.10, which compares to an average of $7.27 prior to the announcement of the sale and a median target according to Thomson One Analytics of $6.95. The change is largely on the back of Macquarie cutting its target from $9.88 to $7.19 to reflect a more conservative approach and modest earnings adjustments on the back of changes to the broker’s interest rate forecasts.

Shares in Primary today are weaker in line with the broader market and as at 11.00am the stock was down 15c or 3% at $4.85. Its trading range over the past year has been $4.35 to $12.75.

Click to view our Glossary of Financial Terms