Why the Capitol Health Ltd share price jumped 25% yesterday

News of asset sales was well received by Capitol Health Ltd (ASX:CAJ) shareholders.

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The Capitol Health Ltd (ASX: CAJ) share price jumped 25% to $0.25 yesterday, after the embattled company announced the sale of some assets and updated its forecast earnings.

Capitol Health will sell its NSW radiology businesses to I-Med for $80.3 million after adjustments, with the sale expected to complete by the end of August. The decision to sell the assets came as a result of several challenges including poor performance, and difficulty integrating the four businesses.

The sale price represents a price of 8.5x forecast 2017 EBITDA, which is a respectable price despite the issues. The funds will be redirected into refinancing a $50 million unsecured note in May next year, as well as reinvesting in more acquisitions and organic growth.

Cash will be $100 million and estimated total debt will be $55.8 million after the transaction completes.

Additionally, management identified another $1.5 million to $2 million per annum in cost savings that could be achieved. A small buyback is also planned post-divestment.

Forecasts

Capitol Health has forecast earnings before interest, tax, depreciation and amortisation (EBITDA) of $21.5 million in 2017, and $19 million to $21 million (after the asset sale) in 2018.

With estimated net cash of around $40 million after the divestment, that gives Capitol Health an Enterprise Value to EBITDA (EV/EBITDA) ratio of around 8x 2018’s earnings, which is neither unusually cheap nor overly expensive. If you consider that its troubled NSW assets were divested for 8.5x EBITDA, then perhaps the rest of Capitol Health is still somewhat undervalued.

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Motley Fool contributor Sean O'Neill has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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