Making the most of opportunities as they arise
Japara Healthcare (JHC) has acquired the Riviera residential aged care portfolio in NSW consisting of 265 operational beds and 507 bed licenses. This brings the total operational bed places to 4,171 across the Group. The acquisition includes four aged care facilities (Brighton-Le-Sands, Chatswood, Doonside and Wyong), 4.3 hectares of development land in Wyong and vacant possession of a closed facility in Toukley.
As part of the acquisition, JHC will complete and commission the Brighton-Le-Sands home over 18 months and estimate it will generate in excess of A$23m from net RAD inflows.
Acquisition price appears attractive
The acquisition price was A$39m net of A$14.5m in RADs. The non-operational bed licenses (242) are estimated to be worth A$11.0m and vacant land, approximately A$6.5m, which notionally values the acquisition at circa A$21.5m. JHC has guided to an EBITDA uplift of A$3.5m to A$4.0m in FY19. This implies an EBITDA multiple of 5.4x to 6.0x which appears to be an attractive acquisition price. The acquisition will be funded from existing cash and debt facilities. At the 1HFY18 results JHC noted it had funding capacity of A$196m. The transaction was completed on 1 April 2018.
Changes to forecasts
We make no changes to forecasts in FY18, with the three month contribution from the acquisition being offset by transaction costs. To reflect the contribution from the acquisition we increased EBITDA by 4.7% for FY19 and by 2.8% in FY20.
Following the changes to forecasts our DCF valuation has increased to A$2.00 (previously A$1.91). Our EV/EBITDA multiple remains unchanged at 10.0x and given its driven off the FY18 EBITDA the valuation remains at A$1.96. As a result our equally weighted DCF and EV/EBITDA multiple valuation (and our share price target) has increased to A$1.96 (previously A$1.93).
The downside risk for JHC relates to further cuts to funding and the upside risk relates to possible corporate activity (with Moelis Australia holding a strategic 13% stake).
We believe it will be another six months before the market gains confidence on the operational recovery. We maintain our Hold recommendation.
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