AUSTRALIA JHC AU Price (at 06:10, 27 Apr 2015 GMT) Outperform A$2.71 Valuation A$ 2.97 - DCF (WACC 9.1%, beta 1.1, ERP 5.0%, RFR 4.5%, TGR 2.3%) 12-month target A$ 3.00 12-month TSR % +14.7 Volatility Index Medium Market cap A$m 713 30-day avg turnover A$m 1.3 Number shares on issue m 263.0 Investment fundamentals Year end 30 Jun 2014A 2015E 2016E 2017E Revenue m 229.3 259.0 281.5 311.9 EBIT m 31.6 40.7 41.2 45.7 Adjusted profit m 22.2 29.1 28.9 32.4 EPS adj 8.5 11.1 11.0 12.3 EPS adj growth % nmf 30.8-0.8 12.2 PER adj x 32.0 24.5 24.7 22.0 PER rel x 1.72 1.42 1.88 1.88 Total div yield % 0.0 4.1 4.1 4.5 REG AU Price (at 06:10, 27 Apr 2015 GMT) Outperform A$5.75 Valuation A$ 4.90 - DCF (WACC 9.1%, beta 1.1, ERP 5.0%, RFR 4.5%, TGR 2.3%) 12-month target A$ 5.40 12-month TSR % -3.0 Volatility Index Medium Market cap A$m 1,727 30-day avg turnover A$m 1.7 Number shares on issue m 300.3 Investment fundamentals Year end 30 Jun 2015E 2016E 2017E 2018E Revenue m 392.6 426.0 468.7 503.5 EBIT m 71.4 74.7 82.9 89.8 Adjusted profit m 50.8 54.0 60.1 65.4 EPS adj 16.9 18.0 20.0 21.8 EPS adj growth % nmf 6.2 11.2 8.8 PER adj x 34.0 32.0 28.8 26.4 PER rel x 1.98 2.44 2.45 2.48 Total div yield % 1.4 3.1 3.5 3.8 EHE AU Price (at 06:10, 27 Apr 2015 GMT) Neutral A$6.15 Valuation A$ 4.90 - DCF (WACC 9.1%, beta 1.1, ERP 5.0%, RFR 4.5%, TGR 2.3%) 12-month target A$ 5.40 12-month TSR % -7.4 Volatility Index Medium Market cap A$m 1,112 30-day avg turnover A$m 2.8 Number shares on issue m 180.9 Investment fundamentals Year end 30 Jun 2015E 2016E 2017E 2018E Revenue m 276.8 311.9 326.9 348.9 EBIT m 58.2 70.6 74.2 78.6 Adjusted profit m 41.0 50.2 52.9 56.0 EPS adj 22.6 27.7 29.3 30.9 EPS adj growth % nmf 22.5 5.5 5.8 PER adj x 27.2 22.2 21.0 19.9 PER rel x 1.58 1.69 1.79 1.87 Total div yield % 3.0 4.5 4.8 5.0 28 April 2015 Macquarie Securities (Australia) Limited Propco sale & lease back Event Listed REIT Generation Healthcare announced today it has contracted to acquire the property of three aged care facilities from non-profit operator RSL Care, which will lease them back at a rate of 7.65%. We assess the implications and potential benefit for the listed providers if they chose to pursue a similar path. Impact High price obtained for assets: GHC will pay RSL Care $45.8m for a total of 311 beds, which equates to $147k per bed. Although the assets do appear to be good quality (occupancy 98-99%, 100% single rooms and relatively new build) this is a relatively high figure for assets not based in inner-metro locations, relative to industry WholeCo acquisition prices (which typically range ~ $100k to $150k). GHC, however, will not incur any of the bond liability, which will remain with the operating entity. But, RSL Care is also giving away plenty of EBITDA: RSL Care will pay $3.55m in rent on the three assets going forward, which equates to $11,400 per bed (occupied and unoccupied); more than half of the $17k-$21k EBITDA per bed (ex-corporate costs) the operator generates for the three assets. Transaction best thought of as a capital raise for RSL Care: With longterm leases locked in (20y plus 2x 10y at discretion of RSL Care) the most important variable to GHC will be the yield, with the asset price somewhat dependent on the quantum of capital that RSL Care wanted to raise. Hence we believe the transaction overall is akin to a capital raising from RSL Care at a price of 7.65% (plus inflation, which translates to an adjusted rate of ~10.65%). Deal makes sense for RSL Care, which doesn t have easy access to capital: RSL Care aims to expand its portfolio by ~2,500 places over the next five years. Like most non-profit entities, we suspect it has an aversion to debt, meaning that access to capital is relatively limited and a sale-and-lease back at an effective rate of ~10% is relatively attractive. PropCo split doesn t make sense for listed operators however: If a listed provider was already carrying lots of debt and trading at a low PE (less than 13x, the inverse of 7.65%), then it would be cheaper to access capital through a sale and lease-back than raise debt or equity. REG, JHC and EHE do not carry much debt however, and all trade at a PE multiple well in excess of 13x, meaning that if they wished to raise capital to fund expansion, there are much cheaper ways of doing so. There are also another costs in selling property in the form of (i) loss of strategic control of that asset, ie the ability to refurbish, expand & alter the facility as they please, (ii) tax expense from potential profit on sale of asset, and (iii) losing the option of carrying out a sale and lease back in the future if company or industry circumstances change. Outlook Sale and lease back of property appears to be an attractive financing opportunity, in our view, for non-profit operators looking to raise capital. For listed providers, however, we see little benefit given the significantly cheaper sources of funding available through debt and equity markets. Please refer to page 6 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
Makes sense for non-profit...but less attractive for REG, JHC and EHE RSL Care obtained a high price for assets: RSL care, a non-profit provider, has contracted to sell three facilities to GHC, which will lease back the facilities on 20y leases with two 10y options to extend. GHC will pay RSL Care $45.8m for a total of 311 beds, which equates to $147k per bed. Although the assets do appear to be good quality (occupancy is 98-99%, 100% single rooms and relatively new build) this is still a high figure relative to industry average acquisition prices for WholeCo aged care assets, which typically sit in the vicinity of $100k to $150k net of bonds. Further with the assets based regionally we also suspect that the facilities attract relatively low bonding (bond for facilities will continue to sit with RSL Care). Fig 1 Assets sold appear to be relatively high quality Location Places Occupancy Date built Price per bed Baycrest Hervey Bay 101 98% 41 beds mid-1990s, 60 beds built 2006 $143k Darlington Tweed Heads 90 99% 2005 / 07 $150k Tantula Road Alexandra Headland, Sunshine Coast 120 98% 2005 / 07 $149k However, RSL is also giving away plenty of EBITDA: RSL Care will pay $3.55m in rent on the three assets going forward, which equates to $11,400 per bed (occupied and unoccupied); which is more than half of the $17k-$21k EBITDA per bed than RSL Care currently generates for the three assets. Transaction best thought of as a capital-raise for RSL Care: In some ways, the purchase price of these assets is somewhat arbitrary. With a long-term lease locked in, the variable most important to GHC will be the yield, with the asset price likely to have been primarily driven by the quantum of capital that RSL Care wanted to raise. Hence we believe the transaction overall is best viewed as being akin to RSL Care raising capital at a price of 7.65% (with payments indexed to inflation). Deal makes sense for RSL Care, which doesn t have easy access to capital: GHC s presentation states that RSL Care wishes to expand its offering by ~2,500 places over the next five years. Like most non-profit entities, we suspect RSL Care has an aversion to carrying significant debt on its balance sheet, meaning that options to gain capital to expand are relatively limited and a sale-and-lease back at an effective rate of 7.65% is attractive. With easy access to capital, it doesn t make sense for listed providers to follow: If one of the listed providers also did not have access to cheap capital, then a sale and lease-back deal such as this would make sense, i.e. if a provider were already carrying lots of debt and were trading at a lower PE multiple than 13x (the inverse of 7.65%), then it would be cheaper to access capital through a sale and lease-back, than raise debt or equity. REG, JHC and EHE do not carry much debt however, and all trade at a PE multiple well in excess of 13x, meaning that if they wished to raise capital to fund expansion, there are much cheaper ways of doing so. There are also other costs in selling property, in the form of (i) loss of strategic control of that asset, i.e. the ability to refurbish, expand & alter the facility as they please, (ii) tax expense from potential profit on sale of asset, and (iii) losing the option of carrying out a sale-and-lease back at a later date if company or industry conditions change. Also doesn t make sense for REG, EHE and JHC to be an acquirer of others property: Conversely, we also believe that becoming a purchaser of another operator s property is unlikely to appeal to any of the listed providers, given (i) for a similar price, JHC, EHE and REG can buy WholeCo assets for a similar (or lower) price to this PropCo transaction (although they would also inherit resident s bond liability), and (ii) the core competency for each provider lying in operating facilities in our view, rather than simply owning assets. Funding source could increase competition for new licences: If this type of sale-and-lease back arrangement becomes more commonplace for non-profits looking to expand their presence, a potential knock-on effect for large listed providers is a potential increase in competition for ACAR licenses and/or more competition in acquiring assets. 28 April 2015 2
Fig 2 Regis Healthcare (REG AU) Profit & Loss 1H14 2H14 1H15 2H15e 1H16e 2H16e 1H17e 2H17e 2014 2015e 2016e 2017e Top Line Government care funding 127.0 129.6 141.8 138.8 149.8 154.6 165.8 169.3 256.6 280.6 304.4 335.0 Resident care funding (incl extras) 52.6 52.6 55.7 56.3 60.6 61.1 66.9 66.8 105.2 112.0 121.6 133.7 Service revenue 179.6 182.2 197.5 195.2 210.3 215.7 232.6 236.1 361.8 392.6 426.0 468.7 Accommodation Funding 12.6 12.9 13.4 14.6 15.7 16.4 17.3 17.8 25.5 28.0 32.1 35.1 Other income 8.8 8.8 7.8 5.8 5.9 4.9 5.4 4.2 17.5 13.6 10.8 9.6 Total Revenue 201.0 203.8 218.7 215.5 232.0 236.9 255.3 258.1 404.8 434.2 468.9 513.4 Growth % 6.1% 9.9% 10.1% 8.9% 14.8% 7.3% 8.0% 9.5% Employee expenses 127.6 129.4 132.8 139.2 147.8 152.1 162.4 163.8 257.0 272.0 299.9 326.2 Resident costs 14.7 14.9 15.6 16.5 16.6 15.3 18.4 16.7 29.6 32.1 31.9 35.1 Administrative expenses 10.4 10.6 14.0 14.3 14.9 15.4 16.3 16.6 21.0 28.3 30.3 32.8 Occupany costs 6.9 6.6 5.7 6.2 6.1 6.8 6.7 7.5 13.5 11.9 12.9 14.2 Total operating expenses 159.6 161.5 168.1 176.2 185.4 189.6 203.7 204.6 321.1 344.3 374.9 408.3 EBITDA 41.4 42.3 50.6 39.3 46.6 47.4 51.6 53.5 83.7 89.9 93.9 105.1 margin % 23.1% 23.2% 25.6% 20.1% 22.1% 22.0% 22.2% 22.7% 23.1% 22.9% 22.1% 22.4% D&A 8.1 9.2 8.7 9.8 9.3 10.0 10.9 11.4 17.3 18.5 19.2 22.3 EBIT 33.3 33.1 41.9 29.5 37.3 37.4 40.7 42.2 66.4 71.4 74.7 82.9 margin % 18.5% 18.2% 21.2% 15.1% 17.7% 17.3% 17.5% 17.9% 18.4% 18.2% 17.5% 17.7% Extraordinary items 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Net interest 0.0 0.0-0.7-0.8-1.3-1.2-1.4-1.5 0.0-1.5-2.4-2.9 Pretax Profit 33.3 33.1 42.6 30.3 38.6 38.6 42.1 43.7 66.4 72.9 77.1 85.8 Tax Expense 12.9 9.2 11.6 11.6 12.6 13.1 22.1 23.1 25.7 Tax rate 30.3% 30.3% 30.0% 30.0% 30.0% 30.0% 30.3% 30.0% 30.0% Net Profit 29.7 21.1 27.0 27.0 29.5 30.6 50.8 54.0 60.0 Reported Profit 29.7 21.1 27.0 27.0 29.5 30.6 50.8 54.0 60.0 Add back Extraordinary items 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Underlying NPAT 29.7 21.1 27.0 27.0 29.5 30.6 50.8 54.0 60.0 Growth -9.1% 27.8% 9.2% 13.2% 6.2% 11.2% Basic EPS (cents) 9.9 7.0 9.0 9.0 9.8 10.2 16.9 18.0 20.0 Adjusted diluted EPS (cents) 9.9 7.0 9.0 9.0 9.8 10.2 16.9 18.0 20.0 Growth -9.1% 27.8% 9.2% 13.2% 6.2% 11.2% Free cash flow (incl RAD flows) 49.9 24.1 36.3 22.3 49.6 36.0 74.0 58.6 85.6 FCFE per share $ 0.17 $ 0.08 $ 0.12 $ 0.07 $ 0.17 $ 0.12 $ 0.25 $ 0.20 $ 0.29 P/FCFE 11.9 24.6 16.3 26.6 12.0 16.5 16.0 20.2 13.9 Book value 186.0 207.2 210.0 210.0 212.5 213.6 207.2 210.0 213.6 Book value per share $ 0.62 $ 0.69 $ 0.70 $ 0.70 $ 0.71 $ 0.71 $ 0.69 $ 0.70 $ 0.71 NTA (52.5) (31.3) (28.5) (28.5) (26.0) (24.9) (31.3) (28.5) (24.9) NTA per share $ (0.17) $ (0.10) $ (0.09) $ (0.09) $ (0.09) $ (0.08) $ (0.10) $ (0.09) $ (0.08) P/BV 6.4 5.7 5.6 5.6 5.6 5.6 5.7 5.6 5.6 P/NTA (22.6) (37.9) (41.7) (41.6) (45.7) (47.6) (37.9) (41.6) (47.6) EV/EBITDA 22.0 27.6 23.0 22.8 20.4 19.6 12.1 11.5 10.0 EV/EBIT 26.6 36.8 28.8 28.8 25.9 24.9 15.2 14.4 12.7 PE 39.9 56.2 43.9 44.0 40.2 38.8 23.3 22.0 19.8 DPS - 8.0 9.0 9.0 9.8 10.2 8.0 18.0 20.0 Div yield 0.0% 2.0% 2.3% 2.3% 2.5% 2.6% 2.0% 4.6% 5.1% Payout ratio 0% 114% 100% 100% 100% 100% 48% 100% 100% Franking 0% 100% 100% 100% 100% 100% 100% 100% 100% Ordinary Fully Paid 300.3 300.3 300.3 300.3 300.3 300.3 300.3 300.3 300.3 EFPOWA 300.3 300.3 300.3 300.3 300.3 300.3 300.3 300.3 300.3 Cashflow Analysis 1H14 2H14 1H15 2H15e 1H16e 2H16e 1H17e 2H17e 2014 2015e 2016e 2017e EBITDA 41.4 42.3 50.6 39.3 46.6 47.4 51.6 53.5 83.7 89.9 93.9 105.1 - Inc. in Working capital 0.0-7.5 2.8-0.2-2.1-0.4-2.9-0.3-7.5 2.6-2.5-3.2 - Net Interest Paid 0.0 0.0 0.0-0.7-0.8-1.3-1.2-1.4 0.0-0.7-2.1-2.6 - Tax Paid 0.0 0.0 13.0 12.9 9.2 11.6 11.6 12.6 0.0 25.9 20.8 24.2 Other 0.0 4.1-34.7-24.0-12.6-19.8-15.0-22.0 4.1-58.7-32.4-36.9 Net Cash in Op Activities 41.4 38.9 31.7 27.3 40.3 37.4 44.1 42.5 80.3 59.0 77.7 86.7 + Asset Sales 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 - Capex, Acq's & Invest. 0.0-6.6-28.0-54.1-51.7-70.1-33.8-35.1-6.6-82.1-121.8-68.9 + Other 0.0-10.9-3.1 0.0 0.0 0.0 0.0 0.0-10.9-3.1 0.0 0.0 Net cash in investing 0.0-17.5-31.1-54.1-51.7-70.1-33.8-35.1-17.5-85.2-121.8-68.9 - Dividends Paid (before DRP) 0.0 0.0 0.0 0.0 24.1 27.0 27.0 29.5 0.0 0.0 51.2 56.5 + Equity Movements (inc. DRP) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 + Other 0.0-79.3 0.0 0.0 0.0 0.0 0.0 0.0-79.3 0.0 0.0 0.0 + Accommodation bonds 0.0 79.3 43.5 54.7 47.7 55.0 39.2 28.6 79.3 98.2 102.7 67.8 Net cash in financing 0.0 0.0 43.5 54.7 23.6 28.0 12.2-0.9 0.0 98.2 51.5 11.3 Opening Cash balance 0.0 0.0 40.1 72.9 100.8 113.0 108.2 130.8 0.0 40.1 100.8 108.2 Net Increase in Cash 41.4 21.4 44.1 27.9 12.2-4.7 22.6 6.5 62.8 72.0 7.4 29.1 + Adjusting Figure (inc. net exch. diff.) -41.4 18.7-11.3 0.0 0.0 0.0 0.0 0.0-22.7-11.3 0.0 0.0 Net Cash movement 0.0 40.1 32.8 27.9 12.2-4.7 22.6 6.5 40.1 60.7 7.4 29.1 Cash Balance 0.0 40.1 72.9 100.8 113.0 108.2 130.8 137.4 40.1 100.8 108.2 137.4 Performance Analysis Balance Sheet 2014 2015e 2016e 2017e Cash 40.1 100.8 108.2 137.4 Inventories 0.0 0.0 0.0 0.0 FY14 Cost Breakdown PP&E 579.1 650.4 753.0 799.6 Occupany costs Intangibles 237.2 238.5 238.5 238.5 4% Other Assets 28.9 30.2 30.6 31.1 Administrative Total Assets 885.3 1019.9 1130.3 1206.5 expenses Total debt 0.0 0.0 0.0 0.0 7% Accommodation bonds 630.7 728.9 831.6 899.4 Resident costs Other Liabilities 87.0 83.9 88.8 93.6 9% Total Liabilities 717.7 812.8 920.3 993.0 Net Assets 167.6 207.2 210.0 213.6 Shareholders Funds 271.3 271.0 271.0 271.0 Retained earnings -35.8 3.9 6.8 10.3 Total Shareholder Funds 167.6 207.2 210.0 213.6 Ratios 2013E 2014E 2015E 2016E Employee Working Capital (65.9) (63.3) (65.8) (69.0) expenses Interest cover (times) na na na 80% Net Debt/Equity (%) -48.7% -51.5% -64.3% Return on Equity (%) 24.5% 25.7% 28.1% ROIC 67.1% 73.4% 108.7% 28 April 2015 3
Fig 3 Japara Healthcare (JHC AU) Profit & Loss 1H14 2H14e 1H15 2H15e 1H16e 2H16e 2013 2014e 2015e 2016e Top Line Government care funding 91.4 85.0 102.3 105.6 109.0 116.3 167.2 176.4 207.9 225.3 Resident care funding 21.7 31.2 24.3 26.8 27.0 29.2 45.8 52.9 51.1 56.2 Service revenue 113.1 116.2 126.6 132.4 136.0 145.5 213.0 229.3 259.0 281.5 Accommodation Funding 7.5 6.7 9.0 8.9 9.0 7.1 14.3 14.2 17.9 16.1 Other income 0.2 2.7 1.2 1.2 1.3 1.3 2.6 2.9 2.4 2.5 Total Revenue 120.8 125.6 136.8 142.4 146.2 153.9 229.9 246.4 279.2 300.1 Growth % 13.2% 13.4% 6.9% 8.0% 7.2% 13.3% 7.5% Employee expenses 81.4 90.2 89.9 94.1 99.8 102.5 152.6 171.6 184.0 202.4 Resident costs 7.9 19.9 9.5 10.2 9.3 10.5 24.3 27.8 19.7 19.7 Other costs (repairs & maint, rent, insu 11.6 (4.6) 12.6 12.7 12.9 13.2 11.2 7.0 25.3 26.1 Total operating expenses 100.9 105.5 112.0 117.0 121.9 126.2 188.1 206.4 229.0 248.1 EBITDA 19.9 20.1 24.8 25.5 24.3 27.6 41.8 40.0 50.3 52.0 margin % 17.6% 17.3% 19.6% 19.2% 17.9% 19.0% 19.6% 17.4% 19.4% 18.5% D&A 4.5 3.9 4.7 4.8 5.1 5.6 8.4 8.4 9.5 10.8 EBIT 15.4 16.2 20.1 20.6 19.2 22.0 33.4 31.6 40.7 41.2 margin % 13.6% 13.9% 15.9% 15.6% 14.1% 15.1% 15.7% 13.8% 15.7% 14.6% Extraordinary items 0.8 0.0 0.7 0.0 0.0 0.0-0.2 0.8 0.7 0.0 Net interest 0.0-0.2 0.5 0.6 0.2-0.2 0.8-0.2 1.0 0.0 Pretax Profit 15.4 16.3 19.6 20.1 19.0 22.3 32.6 31.7 39.7 41.3 Tax Expense 4.6 4.9 4.5 6.0 5.7 6.7 9.7 9.5 10.6 12.4 Tax rate 30.0% 30.0% 23.1% 30.0% 30.0% 30.0% 29.7% 30.0% 26.6% 30.0% Net Profit 10.8 11.4 15.1 14.0 13.3 15.6 22.9 22.2 29.1 28.9 Reported Profit 11.6 11.4 15.8 14.0 13.3 15.6 22.9 23.1 29.8 28.9 Add back Extraordinary items -0.8 0.0-0.7 0.0 0.0 0.0 0.2-0.8-0.7 0.0 Underlying NPAT 10.8 11.4 15.1 14.0 13.3 15.6 23.1 22.2 29.1 28.9 Growth 40.0% 22.8% -11.8% 11.0% -4.0% 31.1% -0.8% Basic EPS (cents) 0.0 4.4 6.0 5.3 5.1 5.9 0.0 4.4 11.3 11.0 Adjusted diluted EPS (cents) 4.1 4.4 5.7 5.3 5.1 5.9 0.0 8.5 11.1 11.0 Growth 39.7% 22.5% -11.8% 11.0% 30.8% -0.8% Free cash flow (incl RAD flows) 23.0 6.7 87.5 40.3 36.6 44.6 29.7 127.7 81.2 FCFE per share $ 0.09 $ 0.03 $ 0.33 $ 0.15 $ 0.14 $ 0.17 $ 0.11 $ 0.49 $ 0.31 P/FCFE 11.5 39.4 3.0 6.6 7.2 5.9 17.8 4.1 6.5 Book value 493.3 514.0 531.3 530.9 529.6 531.8 514.0 530.9 531.8 Book value per share $ 1.88 $ 1.96 $ 2.02 $ 2.02 $ 2.01 $ 2.02 $ 1.96 $ 2.02 $ 2.02 NTA 124.5 129.4 119.5 119.1 117.8 120.0 129.4 119.1 120.0 NTA per share $ 0.47 $ 0.49 $ 0.45 $ 0.45 $ 0.45 $ 0.46 $ 0.49 $ 0.45 $ 0.46 P/BV 1.1 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 P/NTA 4.2 4.1 4.4 4.4 4.5 4.4 4.1 4.4 4.4 EV/EBITDA 25.7 25.6 20.8 20.2 21.2 18.6 12.9 10.3 9.9 EV/EBIT 33.2 31.9 25.6 25.0 26.8 23.4 16.3 12.7 12.5 PE 48.9 46.2 35.0 37.7 39.7 33.9 23.8 18.2 18.3 DPS - - 5.5 5.6 5.1 5.9-11.1 11.0 Div yield 0.0% 0.0% 2.7% 2.8% 2.5% 2.9% 0.0% 5.5% 5.5% Payout ratio 0% 0% 96% 104% 100% 100% 0% 100% 100% Franking 0% 0% 100% 100% 100% 100% 100% 100% 100% Ordinary Fully Paid 262.5 262.5 263.0 263.0 263.0 263.0 262.5 262.5 262.5 EFPOWA 262.5 262.5 263.0 263.0 263.0 263.0 262.5 263.0 263.0 Cashflow Analysis 1H14 2H14e 1H15 2H15e 1H16e 2H16e 2013 2014e 2015e 2016e EBITDA 19.9 20.1 24.8 25.5 24.3 27.6 41.8 40.0 50.3 52.0 - Inc. in Working capital -13.8 12.5-25.9 21.4-0.1-0.1 0.0-1.3-4.5-0.2 - Net Interest Paid 0.0 0.0 0.6 0.5 0.6 0.2 0.8 0.0 1.1 0.8 - Tax Paid 0.0 4.6 0.0 4.5 6.0 5.7 8.1 4.6 4.5 11.7 Other 25.6-34.2 37.1-52.9-12.9-11.6-34.6-8.6-15.8-24.5 Net Cash in Op Activities 31.7 3.0 36.6-1.0 17.9 21.8 16.1 34.7 35.6 39.7 + Asset Sales 0.0 0.0 0.7 0.0 0.0 0.0 0.0 0.0 0.7 0.0 - Capex, Acq's & Invest. -30.3-9.2-31.7-10.2-40.4-40.7 2.7-39.5-41.8-81.2 + Other -2.0 0.0-13.5 0.0 0.0 0.0-16.9-2.0-13.5 0.0 Net cash in investing -32.3-9.2-44.4-10.2-40.4-40.7-14.2-41.5-54.6-81.2 - Dividends Paid (before DRP) 0.0 0.0 0.0 14.5 14.7 13.3 0.0 0.0 14.5 28.0 + Equity Movements (inc. DRP) 0.0 5.1-1.3 0.0 0.0 0.0 0.1 5.1-1.3 0.0 + Other 0.0 15.8-10.9 0.0 0.0 0.0-11.8 15.8-10.9 0.0 + Accommodation bonds 9.2 12.9 65.9 51.4 59.1 63.5 0.0 22.1 117.3 122.7 Net cash in financing 9.2 33.7 53.7 37.0 44.5 50.2-11.7 42.9 90.7 94.7 Opening Cash balance 16.7 17.0 28.1 74.0 99.8 121.8 26.6 16.7 28.1 99.8 Net Increase in Cash 8.6 27.6 45.9 25.8 22.0 31.3-9.9 36.2 71.7 53.3 + Adjusting Figure (inc. net exch. diff.) -8.3-16.5 0.0 0.0 0.0 0.0 0.0-24.8 0.0 0.0 Net Cash movement 0.3 11.1 45.9 25.8 22.0 31.3-9.9 11.4 71.7 53.3 Cash Balance 17.0 28.1 74.0 99.8 121.8 153.1 16.7 28.1 99.8 153.1 Performance Analysis Balance Sheet 2013 2014e 2015e 2016e Cash 16.7 28.1 99.8 153.1 Inventories 0.0 0.0 0.0 0.0 FY13 Cost Breakdown Other costs PP&E 61.3 340.8 379.5 449.9 (repairs & Intangibles 32.0 260.5 411.8 411.8 maint, rent, Other Assets 182.8 170.6 64.5 65.4 insurance Total Assets 292.9 800.0 955.6 1080.1 etc) Resident 6% Total debt 0.0 15.8 25.3 25.3 costs Accommodation bonds 183.3 205.3 322.7 445.3 13% Other Liabilities 72.7 64.8 76.8 77.8 Total Liabilities 256.0 286.0 424.8 548.4 Net Assets 36.9 514.0 530.8 531.8 Shareholders Funds 0.1 516.8 517.8 517.8 Retained earnings 36.8-2.8 13.1 14.0 Total Shareholder Funds 36.9 514.0 530.9 531.8 Ratios 2013E 2014E 2015E 2016E Employee Working Capital 3.5 (53.1) (57.5) (57.8) expenses Interest cover (times) na na na 81% Net Debt/Equity (%) -2.4% -14.0% -24.0% Return on Equity (%) 4.3% 5.5% 5.4% ROIC 6.3% 8.9% 10.2% 28 April 2015 4
Fig 4 Estia Health (EHE AU) Profit & Loss 1H14 2H14 1H15 2H15e 1H16e 2H16e 1H17e 2H17e 2014 2015e 2016e 2017e Top Line Government care funding 63.0 82.4 92.8 108.7 112.1 115.2 117.0 121.6 145.4 201.5 227.3 238.6 Resident care funding (incl extras) 26.8 30.4 34.5 40.8 41.5 43.1 43.1 45.2 57.2 75.3 84.7 88.3 Service revenue 89.7 112.8 127.3 149.6 153.6 158.3 160.1 166.8 202.5 276.8 311.9 326.9 Accommodation Funding 6.6 7.4 8.4 9.6 10.9 11.2 11.4 11.5 14.0 18.0 22.0 23.0 Other income 1.3 1.3 1.8 1.5 1.9 1.6 1.9 1.6 2.5 3.3 3.4 3.6 Total Revenue 97.6 121.4 137.5 160.6 166.4 171.0 173.4 180.0 219.0 298.1 337.4 353.4 Growth % 21.0% 6.5% 4.2% 5.2% 22.8% 36.1% 13.2% 4.7% Employee expenses 67.0 67.0 79.4 97.2 97.0 101.9 100.9 107.6 134.0 176.6 198.9 208.5 Resident costs 5.9 5.9 7.7 9.5 8.5 9.3 8.6 9.5 11.8 17.2 17.9 18.1 Other costs 13.2 13.2 17.4 19.1 20.5 19.7 21.4 20.7 26.3 36.5 40.2 42.1 Total operating expenses 86.1 86.1 104.5 125.8 126.0 130.9 130.9 137.8 172.1 230.3 256.9 268.7 EBITDA 11.5 35.4 33.0 34.8 40.3 40.1 42.6 42.1 46.9 67.8 80.4 84.7 margin % 12.8% 31.4% 25.9% 23.3% 26.3% 25.3% 26.6% 25.3% 23.2% 24.5% 25.8% 25.9% D&A - 8.5 4.5 5.1 4.9 5.0 5.1 5.4 8.5 9.6 9.9 10.5 EBIT 11.5 26.9 28.5 29.7 35.5 35.1 37.5 36.8 38.4 58.2 70.6 74.2 margin % 12.8% 23.8% 22.4% 19.9% 23.1% 22.2% 23.4% 22.0% 19.0% 21.0% 22.6% 22.7% Extraordinary items 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Net interest 0.0 0.0 0.0-0.3-0.5-0.6-0.7-0.7 0.0-0.3-1.1-1.4 Pretax Profit 11.5 26.9 28.5 30.0 36.0 35.7 38.2 37.4 38.4 58.5 71.7 75.6 Tax Expense 8.6 9.0 10.8 10.7 11.5 11.2 17.6 21.5 22.7 Tax rate 30.2% 29.8% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% Net Profit 19.9 21.1 25.2 25.0 26.7 26.2 41.0 50.2 52.9 Reported Profit 19.9 21.1 25.2 25.0 26.7 26.2 41.0 50.2 52.9 Add back Extraordinary items 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Underlying NPAT 19.9 21.1 25.2 25.0 26.7 26.2 41.0 50.2 52.9 Growth 26.5% 18.7% 6.2% 4.7% 22.5% 5.5% Basic EPS (cents) 11.0 11.6 13.9 13.8 14.8 14.5 22.6 27.7 29.3 Adjusted diluted EPS (cents) 11.0 11.6 13.9 13.8 14.8 14.5 22.6 27.7 29.3 Growth 26.5% 18.7% 6.2% 4.7% 22.5% 5.5% Free cash flow (incl RAD flows) 64.8 24.6 45.9 33.9 34.1 21.9 89.4 79.8 56.1 FCFE per share $ 0.36 $ 0.14 $ 0.25 $ 0.19 $ 0.19 $ 0.12 $ 0.49 $ 0.44 $ 0.31 P/FCFE 6.6 17.3 9.3 12.6 12.5 19.4 9.5 10.7 15.2 Book value 553.7 574.8 566.4 566.2 567.9 567.4 574.8 566.2 567.4 Book value per share $ 3.06 $ 3.18 $ 3.13 $ 3.13 $ 3.14 $ 3.14 $ 3.18 $ 3.13 $ 3.14 NTA (22.4) (37.9) (46.3) (46.5) (44.7) (45.3) (37.9) (46.5) (45.3) NTA per share $ (0.12) $ (0.21) $ (0.26) $ (0.26) $ (0.25) $ (0.25) $ (0.21) $ (0.26) $ (0.25) P/BV 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 1.5 P/NTA (37.9) (22.4) (18.4) (18.3) (19.0) (18.8) (22.4) (18.3) (18.8) EV/EBITDA 24.7 22.9 19.5 19.4 18.0 18.4 11.8 9.7 9.1 EV/EBIT 28.5 26.8 22.1 22.1 20.5 21.0 13.7 11.0 10.4 PE 42.7 40.4 33.8 34.0 31.8 32.5 20.8 16.9 16.1 DPS - 18.6 13.9 13.8 14.8 14.5 18.6 27.7 29.3 Div yield 0.0% 4.0% 3.0% 2.9% 3.1% 3.1% 4.0% 5.9% 6.2% Payout ratio 0% 159% 100% 100% 100% 100% 82% 100% 100% Franking 0% 100% 100% 100% 100% 100% 100% 100% 100% Ordinary Fully Paid 180.9 180.9 180.9 180.9 180.9 180.9 180.9 180.9 180.9 EFPOWA 180.9 180.9 180.9 180.9 180.9 180.9 180.9 180.9 180.9 Cashflow Analysis 1H14 2H14 1H15 2H15e 1H16e 2H16e 1H17e 2H17e 2014 2015e 2016e 2017e EBITDA 11.5 35.4 33.0 34.8 40.3 40.1 42.6 42.1 46.9 67.8 80.4 84.7 - Inc. in Working capital 0.0-6.8-18.1 12.8 0.0 0.0 0.0 0.0-6.8-5.3 0.1 0.0 - Net Interest Paid 0.0 0.0 0.0 0.0-0.3-0.5-0.6-0.7 0.0 0.0-0.8-1.3 - Tax Paid 0.0 0.0 8.1 8.6 9.0 10.8 10.7 11.5 0.0 16.7 19.7 22.2 Other 0.0 8.6 16.9-42.8-17.4-20.6-20.2-21.5 8.6-25.9-38.0-41.8 Net Cash in Op Activities 11.5 37.2 39.9 13.4 31.6 29.8 32.4 31.4 48.7 53.3 61.5 63.8 + Asset Sales 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 - Capex, Acq's & Invest. 0.0-81.0-74.1-15.2-7.9-8.2-23.8-24.1-81.0-89.3-16.1-47.9 + Other 0.0-5.0-3.1 0.0 0.0 0.0 0.0 0.0-5.0-3.1 0.0 0.0 Net cash in investing 0.0-86.0-77.2-15.2-7.9-8.2-23.8-24.1-86.0-92.4-16.1-47.9 - Dividends Paid (before DRP) 0.0 0.0 0.0 0.0 33.6 25.2 25.0 26.7 0.0 0.0 58.8 51.7 + Equity Movements (inc. DRP) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 + Other 0.0-50.6 0.0 0.0 0.0 0.0 0.0 0.0-50.6 0.0 0.0 0.0 + Accommodation bonds 0.0 50.6 30.7 17.8 22.0 12.0 25.2 14.4 50.6 48.5 33.9 39.6 Net cash in financing 0.0 0.0 30.7 17.8-11.6-13.2 0.2-12.3 0.0 48.5-24.8-12.1 Opening Cash balance 0.0 0.0 84.5 36.7 52.7 64.8 73.2 82.0 0.0 84.5 52.7 73.2 Net Increase in Cash 11.5-48.8-6.6 16.0 12.1 8.4 8.9-5.1-37.3 9.4 20.5 3.8 + Adjusting Figure (inc. net exch. diff.) -11.5 133.3-41.2 0.0 0.0 0.0 0.0 0.0 121.8-41.2 0.0 0.0 Net Cash movement 0.0 84.5-47.8 16.0 12.1 8.4 8.9-5.1 84.5-31.8 20.5 3.8 Cash Balance 0.0 84.5 36.7 52.7 64.8 73.2 82.0 77.0 84.5 52.7 73.2 77.0 Performance Analysis Balance Sheet 2014 2015e 2016e 2017e Cash 84.5 52.7 73.2 77.0 Inventories 0.0 0.0 0.0 0.0 FY14 Cost Breakdown PP&E 271.1 351.7 357.9 395.4 Intangibles 510.6 612.7 612.7 612.7 Other Assets 21.6 23.1 24.4 25.0 Total Assets 887.8 1040.1 1068.2 1110.0 Other costs Total debt 0.0 0.0 0.0 0.0 15% Accommodation bonds 268.0 419.0 453.0 492.6 Other Liabilities 42.7 46.3 49.0 50.0 Resident costs Total Liabilities 310.7 465.3 502.0 542.6 7% Net Assets 577.1 574.8 566.2 567.4 Shareholders Funds 600.4 601.0 601.0 601.0 Retained earnings -23.3-26.2-34.8-33.6 Total Shareholder Funds 577.1 574.8 566.2 567.4 Ratios 2013E 2014E 2015E 2016E Employee Working Capital (21.9) (27.2) (27.1) (27.1) expenses Interest cover (times) na na na 78% Net Debt/Equity (%) -9.2% -12.9% -13.6% Return on Equity (%) 7.1% 8.9% 9.3% ROIC 11.2% 14.3% 15.1% 28 April 2015 5
Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie First South - South Africa Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3000 index return Neutral (Hold) return within 5% of Russell 3000 index return Underperform (Sell) return >5% below Russell 3000 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down 60 100% in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 40 60% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 30 40% in a year. Low medium stock should be expected to move up or down at least 25 30% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 31 March 2015 AU/NZ Asia RSA USA CA EUR Outperform 48.99% 59.51% 49.30% 43.79% 59.59% 52.20% (for US coverage by MCUSA, 7.42% of stocks followed are investment banking clients) Neutral 34.12% 26.62% 35.21% 50.29% 34.93% 31.32% (for US coverage by MCUSA, 5.68% of stocks followed are investment banking clients) Underperform 16.89% 13.87% 15.49% 5.93% 5.48% 16.48% (for US coverage by MCUSA, 0.87% of stocks followed are investment banking clients) JHC AU vs Small Ordinaries, & rec history REG AU vs Small Ordinaries, & rec history EHE AU vs Small Ordinaries, & rec history (all figures in AUD currency unless noted) (all figures in AUD currency unless noted) (all figures in AUD currency unless noted) Note: Recommendation timeline if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, April 2015 12-month target price methodology JHC AU: A$3.00 based on a DCF methodology REG AU: A$5.40 based on a DCF methodology EHE AU: A$5.40 based on a DCF methodology Company-specific disclosures: JHC AU: Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Japara Healthcare Limited's equity securities. MACQUARIE CAPITAL (AUSTRALIA) LIMITED or one of its affiliates managed or co-managed a public offering of securities of Japara Healthcare Ltd in the past 24 months, for which it received compensation. MACQUARIE EQUITIES LIMITED or one of its affiliates managed or comanaged a public offering of securities of Japara Healthcare Ltd in the past 24 months, for which it received compensation. REG AU: MACQUARIE CAPITAL (AUSTRALIA) LIMITED or one of its affiliates managed or co-managed a public offering of securities of Regis Healthcare Ltd in the past 12 months, for which it received compensation. MACQUARIE EQUITIES LIMITED or one of its affiliates has provided Regis Healthcare Ltd with investment advisory services in the past 12 months, for which it received compensation. MACQUARIE EQUITIES LIMITED or one of its affiliates managed or comanaged a public offering of securities of Regis Healthcare Ltd in the past 12 months, for which it received compensation. Macquarie and its affiliates collectively and beneficially own or control 1% or more of any class of Regis Healthcare Limited's equity securities. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures. Target price risk disclosures: JHC AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. REG AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. 28 April 2015 6
EHE AU: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. Analyst certification: The views expressed in this research reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the analyst(s) was, is, or will be directly or indirectly related to the inclusion of specific recommendations or views in this research. The analyst principally responsible for the preparation of this research receives compensation based on overall revenues of Macquarie Group Ltd (ABN 94 122 169 279, AFSL No. 318062) ( MGL ) and its related entities (the Macquarie Group ) and has taken reasonable care to achieve and maintain independence and objectivity in making any recommendations. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited (ABN 58 002 832 126, AFSL No. 238947) a Participant of the Australian Securities Exchange (ASX) and Chi-X Australia Pty Limited. This research is distributed in Australia by Macquarie Equities Limited (ABN 41 002 574 923, AFSL No. 237504) ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited ( MENZ ) an NZX Firm. Macquarie Private Wealth s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN 46 008 583 542, AFSL No. 237502) ( MBL ) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act 1989. Any MGL subsidiary noted in this research, apart from MBL, is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research is general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose this research in any way. If you received it in error, please tell us immediately by return e-mail and delete the document. We do not guarantee the integrity of any e-mails or attached files and are not responsible for any changes made to them by any other person. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but the Macquarie Group does not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group produces a variety of research products, recommendations contained in one type of research product may differ from recommendations contained in other types of research. The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures. 28 April 2015 7