4 reasons why I think the Zenitas Healthcare Ltd share price is a buy

I think the Zenitas Healthcare Ltd (ASX:ZNT) share price is attractive.

a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

I believe that if you're going to beat the market over the long-term it's easier to do it with smaller businesses than larger ones. It's much easier to double a business worth $100 million compared to one worth $100 billion.

With that in mind, I believe that the Zenitas Healthcare Ltd (ASX: ZNT) share price is a very good prospect for the future.

Here are four reasons why I'm a shareholder of the business:

Ageing population

The healthcare industry has a very strong tailwind with Australia's ageing population. The number of people over 65 is expected to grow by 75% over the next two decades.

All of these retirees are more likely to need healthcare assistance in one form or another, which is why most healthcare stocks have done so well over the past few years and should continue to grow earnings nicely.

Zenitas operates in the home care, allied care and primary care segments of the healthcare industry. It is already generating good growth for its businesses with organic growth coming in at 7.5% for the half-year to 31 December 2017.

Home care

I'm particularly excited by the home care area of Zenitas' business because all stakeholders involved with a patient would prefer they are cared for at home rather than a hospital. It's nicer for them to be at home, plus it's normally cheaper compared to expensive hospital care.

If Zenitas can become a large player, or even the number one player, in the home care space in Australia it will have enormous benefits for shareholders.

Acquisitions

Zenitas isn't just growing through strong organic growth, it's also make strategic acquisitions to bolster its business, expand margins and grow its geographical network.

A company shouldn't acquire businesses just to expand, but I believe that Zenitas is very effectively using its bolt-on buys to boost its earnings.

Dividend

Finally, Zenitas has just started to pay a dividend. It's starting with one cent per share, which represented a 37.9% payout ratio of the half-year earnings per share. If we assume another one cent per share payment at the year end the current dividend yield is 1.7%.

I would strongly recommend to the Zenitas leadership keep the dividend payout ratio below 50%, or close to 33%, and steadily increase the dividend thereby keeping most of the profit for re-investing back into growing the business.

Foolish takeaway

I'm a shareholder of Zenitas but I'm looking to add more parcels of shares as the business delivers on its growth targets. I think it's a buy at the current price of roughly 20 times FY18's estimated earnings.

Motley Fool contributor Tristan Harrison owns shares of Zenitas Healthcare Ltd. The Motley Fool Australia has recommended Zenitas Healthcare Ltd. 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 Scott Phillips.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »