The successes of Regis Healthcare and Japara Healthcare may lure more to the market. Photo: Nic WalkerA strong sharemarket debut from Regis Healthcare and Japara Healthcare’s resilient start to public ownership will lure more aged-care providers down the initial public offering route, analysts and experts have said.
Patrick Reid, the chief executive of industry lobby group Leading Age Services Australia, said a boom in the section of the population aged over 65 years made the sector attractive to investors.
“In terms of demand, we need to build around 80,000 beds in the next 10 years,” he said. “One of the challenges is the cost to build those beds is about $21 billion. The Commonwealth isn’t in a position to fund that itself.”
Although the rising demand from the ageing population is underpinning a need to build beds, it is not the main reason that companies are raising capital from equity markets.
An analyst who declined to be named said the rush of aged-care operators to the market was based on the high prices they were able to get. Regis shares closed at $4.02, a 10 per cent rise from the $3.65 offer price. At that price the $1.1 billion company is valued at about 25 times its net earnings in 2015-16.
In comparison, Japara’s forward price-to-earnings multiple, a measure used to show how expensive a company is compared to its peers, is 22 times. Healthcare companies in the S&P/ASX200 index are trading on a forward multiple of 18 times.
The analyst said more aged-care IPOs are “highly likely, just given the multiple that Regis got away on”.
In terms of potential IPO candidates, Mr Reid said: “There is a few lining up.”
The float of New Zealand operator Oceania Living was recently pulled in favour of a trade sale. However the Quadrant Private Equity-backed operator Estia Health is progressing towards an IPO early next year, a source familiar with the sale process said.
However Mr Reid urged potential investors to consider the risks posed by changes to subsidy and regulation.
Recent policy changes have led to the removal of the payroll tax supplement and dementia supplement for aged-care providers. “We saw the outflow of $700 million of funding in May and June this year,” Mr Reid said.
“That’s the sovereign risk that I think investors need to weigh carefully.”
Japara’s share price has been jolted by the policy changes. The stock closed down 0.8 per cent on Tuesday at $2.37.
After listing at $2 a share in the $525 million float, Japara has traded above its offer price, but is languishing below a high of $2.72 hit in May.
The analyst said floats coming to the market now, such as Regis, may prove to be better timed. “Given the fact you’ve had a couple of reforms come through … moving forward I think there’s less relative risk,” the analyst said.
But expectations of a ramp up of takeover activity may need to be scaled back. Unlike Japara, which has been buying up smaller operators, Regis has a greater focus on expanding its network by building new homes, as well as adding capacity to existing homes.
In a note to clients, CLSA analysts David Stanton and Zara Lyons said Regis deserved to trade at a premium to Japara because it has higher earnings per place, has more urban places and excess capacity to take in clients
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