Estia Health Ltd (ASX: EHE) floated in December 2014 at $5.75 a share, after private equity firm Quadrant sold down its stake to take the company public. Following the successful IPOs of peers Japara Healthcare Ltd (ASX: JHC) and Regis Healthcare Ltd (ASX: REG) in the same year, Estia shares were heralded as the next big thing as investor appetite for aged care exposure grew with the rise of Australia's ageing population.
Two years on and the picture looks very different. Despite Australia still experiencing an ageing population, with Australian's aged over 65 projected to hit 6.2 million by 2042 (according to Treasury statistics), I still won't be buying Estia shares at current prices. Here's why.
Cobwebs
It's no secret that Estia was floated by private equity firm Quadrant. As is the case more often than not with private equity IPOs, cobwebs can arise well after listing given highly-indebted businesses fail to live up to lofty pro-forma expectations. The result can be tragic, with shareholders experiencing wealth destruction like that seen with Dick Smith Holdings Ltd and Spotless Group Holdings Ltd (ASX: SPO) – both ex-private equity floats.
Of course, not all private equity floats are duds. Quadrant is regarded as leaving plenty of growth on the table in some floats, as is evident with its float of Bapcor Ltd (ASX: BAP) ex-Burson Auto Parts in 2014.
Similarly, other ex-private equity floats like Aconex Ltd (ASX: ACX), Mantra Group Ltd (ASX: MTR) and Ooh!Media Ltd (ASX: OML) outperformed the broader market in 2015, demonstrating ex-private equity-backed businesses can be successful.
That means investors must assess each business on its merits whilst remaining cognisant of its past. Unfortunately, Estia's business outlook doesn't assuage my fears of its past just yet.
Financials
In its 2016 full-year results, management failed to meet updated guidance, despite reporting a 50% and 31% increase in revenues and earnings (EBITDA) respectively. Underlying net profit after tax was down 7.5% on prior guidance, with management citing higher finance costs and depreciation as a drag on NPAT.
Disappointingly, the fall in profit comes at a time when the industry is growing strongly. This implies that the business remains on shaky ground, with adverse industry and government policies (such as the previously announced Government funding cuts) having the potential to materially affect earnings. This raises warning bells in my books.
Foolish takeaway
Although market commentators and pundits predict a round of industry consolidation could see a takeover offer for Estia at current prices, purchasing its shares for that reason is a gamble, in my opinion.
Whilst the business appears to be growing solidly, I remain sceptical of its long-term prospects given the miss in earnings and uncertainty around Government funding. I would consider avoiding its shares for now.
