Health Care Sector Review
Sector: Aged Care
Overview: Recently Metlifecare released their full year result, reporting an underlying profit of $52.4 million, up 13.9 percent from last year. The aged care provider has been the benefactor of our aging population, and the house price appreciation we are seeing in Auckland.
Pros: The house price appreciation we have seen in Auckland helped Metlifecare to a reported Net Profit After Tax of $122.7 million. This includes a $121.2 million “fair value movement of investment properties”, aka an increase in the value of Metlifecare’s retirement villages. Auckland represents 65 percent of Metlifecare’s asset base.
This appreciation in property values flowed through to the Company’s Net Asset Backing, which rose 14.4 percent to $4.29 per share.
With a share price of $4.23, and an NTA of $4.29, the Company currently trades at a small discount to its Net Asset Backing. The gold standard in the aged care sector, Ryman, currently trades at a 300 percent premium. This suggests Metlifecare may have further upside as they produce consistent results and develop quality villages.
Cons: Village quality is one reason Metlifecare does not attract the same asset premium that Ryman enjoys. Historically, Metlifecare did not have the same focus on the ‘continuum of care’; a model that Ryman has lead the way on. The ‘continuum of care’ refers to a village that provides all the services that the elderly need, all the way from a stand alone unit in a village, through to hospital care.
Metlifecare originally focused on merely building villages, ignoring hospital care. They have moved to address this, with new developments including the hospital care element and old developments being retrofitted where appropriate.
The development pipeline is another area where Metlifecare lags its rivals in the sector. Metlifecare built 133 new units in the 2015 financial year, up from 50 the year before, but below their own target of 200. This compares to Rymans 700+ build rate.
Price performance: The price was unmoved after their result.
Investment outlook: Metlifecare still trades at a discount to its peers on many metrics, most notably their far smaller premium to NTA. Investors will be looking for improved development rates and margins. The rising tide in the sector it likely to raise all boats.
Company: EBOS Group Limited
Overview: Ebos Group Limited is a well diversified Australasian company involved in marketing and distributing healthcare, medical and pharmaceutical products. Ebos operates a trans-Tasman network of distribution, manufacturing and retail assets, distributing products and providing services from its warehouses across New Zealand and Australia.
Ebos Group own businesses involved in two main sectors, healthcare and animal care. The healthcare side of the Group incorporates the sale of healthcare products, logistics and distribution, pharmaceutical and hospital wholesaling, sale and marketing of retail products. NZ consumers will be familiar with a number of healthcare companies owned by Ebos, one such example is Symbion.
The animal care side of the business includes pet food manufacturing, wholesale distribution to veterinary businesses, education and product retailing. The animal care segment has been a steady performer, having experienced 7.7% growth in earnings before interest, tax and non cash expenses on branded products and wholesale operations. The outlook for animal care is positive, underpinned by increased spending on animals as people humanise their pets and treat them as part of the family.
Most health-care stocks are expensive or fairly valued as a result of investors being attracted to their defensive growth attributes. The healthcare market enjoys structural tailwinds relating to the ageing population and the prevalence of varying influenza strains each flu season. We believe that an aging population underpins the capital appreciation enjoyed by Healthcare companies.
Pros: Ebos has been a consistent performer for the past 10 years, growing earnings inline with the successes enjoyed by the healthcare sector, while growing market share. Profit for the year is up 15% on 2014, and their financial position can be regarded as reasonably sound. Ebos have enough earnings to cover interest costs eight times over, while their financial position remains appropriate for the industry. No significant changes in the financial position of the Group, as they maintain a gearing ratio of 23%.
When breaking the business down from a geographical perspective, it becomes clear how important the Australian operations are for the company. Australia accounts for almost 78 percent of the $6 billion in revenue Ebos generated in the 2015 financial year.
In regards to Ebos’ governance, the previous CEO Mark Waller was the driving force behind an acquisition led growth strategy; this led to the acquisition of Symbion in 2013 that transformed Ebos to the second largest pharmaceutical wholesaler and largest hospital distributor in Australia. Although Mark Waller has since moved aside due to ill health, the recently appointed CEO Patrick Davies has held many executive management positions in the healthcare sector and is well qualified to lead Ebos Group into the next stage of growth.
Cons: Risks facing Ebos include changes to the regulatory environment in Australasia, competition from larger rivals in the Northern Hemisphere, and risks regarding an acquisition led growth strategy. Although these risks are worth considering, Ebos maintains a strong financial position, underpinned by reasonable earnings growth. An enviable position when considering that Ebos is the most diversified Australian wholesale pharmaceuticals provider.
Liquidity is an issue investors should be aware of. The stock is tightly held, meaning that the volume traded is quite low for a company of its size. The stock can be moved by one large buyer or seller, which can bite investors who are forced to sell at importune times. The stock would likely benefit from a share split to increase liquidity.
Investment Outlook: It’s so far, so good for Ebos and their growth by acquisition strategy. All it takes is one imprudent purchase to cause troubles. Although, Ebos don’t look likely to make such a misstep. The current share price is indicative of investors’ faith in the team at Ebos. Expectations regarding the performance of the Group in financial year 2016 will be released at the Annual General Meeting on 27 October 2015.