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Here’s why the Estia Health Ltd IPO was overpriced

Quadrant Private Equity has been accused of exploiting investor interest in aged care after the disastrous sharemarket debut of Estia Health Ltd (ASX: EHE) last week.

Estia Health became the third aged-care operator to list on the ASX this year, following the successful floats of Japara Healthcare Ltd (ASX: JHC) and Regis Healthcare Ltd (ASX: REG). However, the stock fell more than 17% on its first day of trade and has since fallen a further 4% to be trading at $4.67. It has already lost nearly $200 million from its initial valuation.

In light of the stock’s performance, Quadrant has been slammed for exploiting a market window created by the success of Japara and Regis with veteran investment banker David Kingston describing the float as over-priced and opportunistic, according to Fairfax media.

Indeed, the aged-care sector does offer enormous growth potential for investors. With Australia’s growing and ageing population, the industry is expected to boom with the Aged and Community Services and Australia group even estimating that the country will need another 82,000 new aged care beds by 2020. Estia seems well placed to benefit, considering its string of acquisitions and its primary focus on acquiring single room facilities (which are the industry’s most sought after).

However, Kingston has reportedly raised questions regarding Estia’s ability to hit 2015 earnings forecasts, especially when compared to the forecasts of Regis, which he considers to be the best company of the three. As an example, while Regis owns almost 30% more beds, it has forecast an EBITDA margin of 20.3% for 2015-16, compared to Estia’s higher forecast EBITDA margin of 23.7%.

Although Estia’s shares are trading at a slight discount compared to Regis and Japara, investors should remain wary of the stock’s actual worth and may wait until the release of Estia’s first-half profit results (which are likely to be released in February) before buying the stock up again.

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Motley Fool contributor Ryan Newman (@ASXvalueinvest) does not own shares in any of the companies mentioned.

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