Shot in arm for health sector
Published in the Sunday Canberra Times, July 2014 By David Potts
A rush from investors for the Healthscope float has many hoping that Medibank will follow suit, writes David Potts.
The sale of Medibank Private is being fast tracked as offshore investors, mostly from Asia, rush the Healthscope float,which opened last week.
Fund managers meeting with Medibank Private executives, who are on a marketing roadshow to institutions, are being told it will be floated within months.
"We don’t have a strong view on Healthscope but we’re very keen on MedibankPrivate," says Angus Geddes, chief executive and founder of tipsheet FatProphets.
Based on the upper price earnings multiple of 23 for Healthscope, MedibankPrivate would raise about $5.5 billion for a Government fighting a deficit blowout as the Senate pulls the Budget apart.
The $2.5 billion float of Heathscope – the private hospital and pathology labs operator which will be returning to the stock exchange after almost four years – has reportedly already secured $1.7 billion.
It is the biggest float in four years but the offer is not available to ordinary investors without a prior allocation from a broker.
This may be a blessing in disguise as analysts say the upper end of the $1.76 to $2.29 asking price – it will be set on July 25 – is too high.
The projected dividend yield is as low as 3 per cent on the upper price.
"The sector is fully valued – that’s why [the funds] are exiting. But we’re looking at it because we like the quality and it’s defensive," says George Boubouras, chief investment officer of Equity Trustees.
The experience of Spotless and QR National (nowAurizon) which were considered expensive by local fund managers was that offshore investors couldn’t get enough of the stock.
Both have gone on to reward investors.
It can also suit fund managers as potential investors to say a float is overvalued in the hope of driving down the final price.
"The promoters have the easiest job in the world. It’s a good business, although there is some regulatory risk around private health insurance," Matt Williams, head of equities at Perpetual says.
Private hospitals rely on a high take-up of health insurance.
But helping Healthscope, the second biggest hospital operator after the very successful Ramsay HealthCare which fund managers say has become expensive, is the Federal Government cutback in the growth of hospital funding.
Public hospital waiting lists coupled with an ageing population are a boon for private hospitals and health funds.
The health care sector is virtually immune from threats from the internet or the state of the economy and so their share prices are less likely to slump in downturn, unlike popular bank and big resources stocks or Telstra.
But Williams says an alternative to Healthscope is to buy stock in Ramsay (for hospitals) and Sonic Healthcare (for pathology).
"You could make up your own Healthscope and probably on the same [price earnings] multiple."
Private equity funds have a reputation for gutting companies and loading them with debt to be sold at an inflated price.
"It’s better to wait and buy them after they’ve been sold and disappointed in the market so the price is de-rated," Geddes says.
While Heathscope is floating with debt of only $46 million which will be paid down to $9.5 million, it has planned capital spending of $274 million.
Government-owned businesses such as MedibankPrivate are seen as being run inefficiently and so ripe for instant cost savings.
"You want to buy off the government," Geddes says.
Although winners such as Freelancer, Sealink Travel and Veda hit the headlines, only about half of all new floats go on to make money says Wealth Within chief analyst, Dale Gillham.
"Waiting to see how they go in the market can save you time and money, and lower your risk," he says.
"If you’re determined to buy into a float then consider investing half in the float and half six to 12 months later."
The other problem is you have nothing but management’sword for what’s in the prospectus.
"In a raging bull market all floats go well but we’re not seeing that this time.here have been signs of fatigue in the last few months," says Chris Stott, chief investment officer at Wilson Asset Management.
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