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Forsyth Barr

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Oceania Healthcare<br>Good Acquisition, But Why the Extra Money?</h2>
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<p><strong>OUTPERFORM</strong></p>
<p>Oceania&nbsp;Healthcare&nbsp;(OCA) has undertaken an NZ$100m equity raise at a fixed offer price of NZ$1.30 (representing a 6.5% discount to the last close price of NZ$1.39) to fund the purchase of two new sites in Auckland. (1) NZ$60m for Waterford on&nbsp;Hobsonville&nbsp;Point — a 100 unit (64 villas and 36 apartments) village with two development zones to add ~60 units/care suites, and (2) NZ$17m for a new Franklin site that currently has 2 hectares of leased land and 4.1 hectares of additional land, the land adjacent to the site offers a further ~215 units and care suites to OCA’s development pipeline. The total acquisition price of NZ$77m leaves an additional ~NZ$20m to help support further growth opportunities.&nbsp;​​​​​​​</p>
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<h3>What's changed?&nbsp;</h3>
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<li><strong>Earnings:</strong>&nbsp;Near-term increases in earnings reflecting the incorporation of the Waterford village. On an EPS basis we leave our FY22E estimates essentially unchanged&nbsp;but reduce our FY23E&nbsp;EPS slightly.&nbsp;</li>
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<h3>What are the balance sheet and earnings impacts?</h3>
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<li><strong>Balance sheet</strong>: The acquisitions in totality are expected to deliver low to mid-single digit NTA accretion per share with the acquisition price for the Hobsonville site (c. NZ$60m) ~3% below CBRE's valuation, as at 31 March 2020, the main driver of the uplift.&nbsp;&nbsp;The equity raise and acquisitions will result in pro-forma gearing of ~28% down from 32.3% at 1H21.&nbsp;</li>
<li><strong>Earnings:</strong>&nbsp;Near-term, OCA expects&nbsp;the&nbsp;Hobsonville&nbsp;Point acquisition to&nbsp;result in low to mid-single digit underlying earnings per share accretion in FY22. We understand that this is based off of the NZ$60m for the Waterford village. All else equal, we estimate that total EPS accretion including the additional NZ$40m raised will be at or around zero percent. We assume an NZ$3–4m annuity EBITDA contribution.</li>
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<h3>Waterford village transacted at ~20x annuity EV/EBITDA multiple; a relatively attractive price&nbsp;</h3>
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<p>At face value, we view the Waterford village&nbsp;as an attractive transaction for OCA and&nbsp;estimate it will contribute&nbsp;~NZ$3-4m per&nbsp;annum&nbsp;in annuity EBITDA, predominately arising from increased deferred management fees (DMF) albeit we expect resale gains to become a bigger part of the picture as the village matures (we understand there was only 1 resale in FY20). An ~NZ$3-4m annuity EBITDA&nbsp;contribution implies&nbsp;a ~20x EV/annuity EBITDA multiple which is relatively attractive in our view and below where the market is currently valuing the aged care stocks.&nbsp;&nbsp;</p>
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<h3>Raising equity to buy land and accelerate development raises a few questions</h3>
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<p>In addition to the c. NZ$60m raised for the acquisition of the Waterford village, OCA raised an additional c. NZ$40m to buy a new land site (for NZ$17m) and to provide "capacity to consider future growth opportunities". Future plans are light on detail but we did not consider OCA over levered prior to the equity raise and expect more details on its accelerated development pipeline at its FY21 result in May.&nbsp;</p>
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<div><strong>Aaron Ibbotson CFA</strong></div>
<div><a href="mailto:aaron.ibbotson@forsythbarr.co.nz" target="_blank" rel="noopener">aaron.ibbotson@forsythbarr.co.<wbr>nz</a></div>
<div>+64 9 368 0024</div>
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<div><strong>Matt Montgomerie</strong></div>
<div><a href="mailto:matt.montgomerie@forsythbarr.co.nz" target="_blank" rel="noopener">matt.montgomerie@forsythbarr.<wbr>co.nz</a></div>
<div>+64 9 368 0124</div>
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Oceania Healthcare Good Acquisition, But Why the Extra Money?

OUTPERFORM
Oceania&nbsp;Healthcare&nbsp;(OCA) has undertaken an NZ$100m equity raise at a fixed offer price of NZ$1.30 (representing a 6.5% discount to the last close price of NZ$1.39) to fund the purchase of two new sites in Auckland. (1) NZ$60m for Waterford on&nbsp;Hobsonville&nbsp;Point — a 100 unit (64 villas and 36 apartments) village with two development zones to add ~60 units/care suites, and (2) NZ$17m for a new Franklin site that currently has 2 hectares of leased land and 4.1 hectares of additional land, the land adjacent to the site offers a further ~215 units and care suites to OCA’s development pipeline. The total acquisition price of NZ$77m leaves an additional ~NZ$20m to help support further growth opportunities.&nbsp;​​​​​​​


What's changed?&nbsp;



Earnings:&nbsp;Near-term increases in earnings reflecting the incorporation of the Waterford village. On an EPS basis we leave our FY22E estimates essentially unchanged&nbsp;but reduce our FY23E&nbsp;EPS slightly.&nbsp;



What are the balance sheet and earnings impacts?



Balance sheet: The acquisitions in totality are expected to deliver low to mid-single digit NTA accretion per share with the acquisition price for the Hobsonville site (c. NZ$60m) ~3% below CBRE's valuation, as at 31 March 2020, the main driver of the uplift.&nbsp;&nbsp;The equity raise and acquisitions will result in pro-forma gearing of ~28% down from 32.3% at 1H21.&nbsp;
Earnings:&nbsp;Near-term, OCA expects&nbsp;the&nbsp;Hobsonville&nbsp;Point acquisition to&nbsp;result in low to mid-single digit underlying earnings per share accretion in FY22. We understand that this is based off of the NZ$60m for the Waterford village. All else equal, we estimate that total EPS accretion including the additional NZ$40m raised will be at or around zero percent. We assume an NZ$3–4m annuity EBITDA contribution.



Waterford village transacted at ~20x annuity EV/EBITDA multiple; a relatively attractive price&nbsp;


At face value, we view the Waterford village&nbsp;as an attractive transaction for OCA and&nbsp;estimate it will contribute&nbsp;~NZ$3-4m per&nbsp;annum&nbsp;in annuity EBITDA, predominately arising from increased deferred management fees (DMF) albeit we expect resale gains to become a bigger part of the picture as the village matures (we understand there was only 1 resale in FY20). An ~NZ$3-4m annuity EBITDA&nbsp;contribution implies&nbsp;a ~20x EV/annuity EBITDA multiple which is relatively attractive in our view and below where the market is currently valuing the aged care stocks.&nbsp;&nbsp;


Raising equity to buy land and accelerate development raises a few questions


In addition to the c. NZ$60m raised for the acquisition of the Waterford village, OCA raised an additional c. NZ$40m to buy a new land site (for NZ$17m) and to provide "capacity to consider future growth opportunities". Future plans are light on detail but we did not consider OCA over levered prior to the equity raise and expect more details on its accelerated development pipeline at its FY21 result in May.&nbsp;



Aaron Ibbotson CFA
aaron.ibbotson@forsythbarr.co.nz
+64 9 368 0024





Matt Montgomerie
matt.montgomerie@forsythbarr.co.nz
+64 9 368 0124



Oceania Healthcare: Good Acquisition, But Why the Extra Money?