Last year several residential aged care operators floated on the ASX with varying degrees of success. Backed by strong fundamental trends of a rapidly aging population and a predicted large shortage of aged care places, large for-profit operators like Japara Healthcare Ltd (ASX: JHC), Estia Health Limited (ASX: EHE) and Regis Healthcare Ltd (ASX: REG) have been tipped for a bright future. Below are four reasons why I believe Japara is currently the pick of the bunch.
Specialised services
According to a report from KordaMentha, dementia is expected to become the leading cause of disability in Australia by 2016. The number of suffers is also expected to increase nearly four folds by 2050.
Japara is focused on provided specialised care for these patients by rolling out a model that is based on national and international practices. Not only is this likely to increase the appeal of Japara for those seeking aged care, it also represents an opportunity for additional extra services revenue.
Whilst Japara's competitors have noted providing high-level clinical care as a strength (i.e. Estia) they do not make specific mention on providing differentiated services.
Management ownership
From a shareholder's perspective it's important that senior management have a sizeable stake in the company. This is because there is likely to be greater alignment of interest between management and shareholders – if management ownership is low then they will likely place less emphasis on long term profitability. Japara's CEO Andrew Sudholz holds a 6% stake in the business whilst his counterparts in Regis and Estia hold stakes of 1% or less.
Absence of controlling shareholding
Japara's shares are free floating with no controlling stakes which increases liquidity of the stock. The same cannot be said of Regis and Estia, where existing shareholders hold 55.7% and 20% of outstanding shares respectively.
It needs to be noted that the controlling stake in Estia is currently held in escrow, which could potentially be sold down once restrictions are lifted. Also whilst the controlling stake in Regis is held by the founder shareholders – who are also members of the board – this could actually work against minority shareholders. For example, hubris might prevent them from accepting a shareholder friendly takeover offer.
Compelling Financials
All three players have strong balance sheets with no debt as they are able to use RAD as interest free capital funding. However in the event of liquidation, Japara will provide the most protection for shareholders since 24% of its market cap is backed by tangible assets based on 2014 financial data. This is significantly higher than Estia (17%) and Regis (n/a) which have a higher portion of goodwill & intangible assets.
Valuation wise Japara is also the pick of the bunch. Based on the 2015 EBITDA forecast provided in the respective prospectus, the average Price-to-EBITDA of the group is 12.5x with Japara the cheapest at 10.9x. Further Japara recently confirmed that it is on track to meet its estimate whilst the others have not, making it relatively less risky.
