Morningstar | Healthscope Only Getting Closer to Being Acquired. See Updated Analyst Note from 31 Oct 2018
We have maintained narrow-moat-rated Healthscope’s AUD 2.40 fair value estimate following its first-quarter trading update and annual general meeting, or AGM. At the current market price of AUD 2.10, we continue to believe the shares are undervalued. Aside from the evolving takeover drama, Healthscope is progressing as expected with the 10.4% operating EBITDA growth achieved in in the first quarter in line with both management guidance and our forecast of 10% for fiscal 2019. The Northern Beaches Hospital, or NBH, opened on time and on budget this week and the AUD 400 million State Capital Payment is still on track to be paid to Healthscope in early 2019.Healthscope continues to pursue a spin-off of 20 freehold hospitals into an unlisted property trust in which the company intends to retain a 51% stake. Guidance was provided for the first time that the properties are worth AUD 1.6 to 1.8 billion, well above the book value of AUD 1.1 billion, and our prior AUD 1.5 billion estimate which we have increased to AUD 1.7 billion. However, the increase is not sufficiently material to warrant changing our fair value estimate and it’s likely the company will be acquired before the transaction proceeds anyway.
Investors' remain focused on the AUD 2.36 per share takeover offer from the BGH Consortium which we expect was timed to maximise its impact at the AGM. The 27% vote against the remuneration report arguably reflects shareholder displeasure at the decision to deny due diligence access earlier in the year and subsequent share price slump. Management is yet to decide if access will be granted this time and appears to be attempting to leverage the first quarter financial performance and NBH opening to buy itself time. However, we continue to believe BGH will eventually be granted access and progress to a formal unconditional offer for the company, particularly as major shareholder, Ellerston, has indicated its support for the bid.
Healthscope is a private healthcare provider, with 45 private hospitals and 48 medical centres and skin clinics across Australia, as well as 56 international pathology laboratories. Co. is also a provider of pathology services in New Zealand, Singapore and Malaysia. Co.'s reportable segments are Hospitals Australia, which provides management and surgical and non-surgical private hospitals; Pathology New Zealand, which provides pathology services in New Zealand; and Other, which provides pathology services in Malaysia, Singapore and Vietnam and practice management services in medical centres in Australia.
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