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Morningstar | Healthscope’s 1H Result Overshadowed by Brookfield Takeover Offer

Narrow-moat-rated Healthscope’s first-half result was somewhat academic considering the high probability the company will be acquired by Brookfield and that a trading update was provided only two weeks ago. Nevertheless, the result was in line with our expectations and we have maintained our earnings forecasts and fair value estimate at Brookfield’s Scheme of Arrangement offer price of AUD 2.50 per share. At the current share price of AUD 2.48, the shares are fairly valued. However, investors may prefer to sell on market rather than incurring the opportunity cost of waiting months for the acquisition to complete, particularly as the share price is only 1% below offer price and we expect no higher offers to materialise.

First-half revenue of AUD 1.2 billion was broadly in line with our full-year forecast of AUD 2.5 billion, as was the first-half EBITDA of AUD 198 million, versus our full-year forecast of AUD 413 million. Management also maintained full-year EBITDA growth guidance at 10%, which is consistent with our forecasts. As was flagged previously, the Northern Beaches Hospital, or NBH, continues to ramp up as expected and will increase group revenue by around 10% by fiscal 2021. The balance sheet was stretched during construction of the NBH but leverage is reducing following the NSW Government State Capital Payment and the opening of the hospital.

We continue to expect the Scheme Meeting to be held in May or June which is conveniently after AustralianSuper’s agreement with BGH ends. This is important as it enables AustralianSuper, Healthscope’s second-largest shareholder, to vote in favour of the Scheme which requires the support of over 75% of Healthscope’s shareholders for it to become unconditional. This support may be required if BGH, which owns 19% of Healthscope, opposes the offer.

In addition to the Scheme of Arrangement offer, Brookfield also intends to make an off-market takeover offer, of AUD 2.40 per share should the Scheme of Arrangement fail to exceed the 75% support required to become compulsory but exceed 50.1%. We continue to believe Brookfield’s Scheme of Arrangement offer is attractive as it exceeds our stand-alone fair value estimate of AUD 2.40 per share. However, the off-market takeover offer is below the current share price of AUD 2.48, meaning shareholders who do not want to wait for the Scheme of Arrangement process to conclude and do not expect a higher offer should sell on market. We will provide a formal recommendation on the Scheme of Arrangement following the release of the Explanatory Booklet, which is expected in April or May 2019.