This 'very attractive' ASX share could be a takeover target with over 50% upside

A stock in a boring industry could offer exciting returns, according to this fund manager.

| More on:

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

Key points
  • WAM has named Estia Health as a bargain opportunity
  • The fund manager Tobias Yao suggested it could be worth $3, implying a possible rise of around 50% if it were to get a takeover offer
  • The industry’s occupancy rate is expected to rise as COVID-19 impacts subside

The Estia Health Ltd (ASX: EHE) share price could offer investors a lot of potential returns according to the fund manager Wilson Asset Management. It suggested the ASX share could rise by more than 50%.

What is Estia Health? For readers that haven't heard of it, it's an aged care operator. At December 2022, it had 72 operational homes, with 6,596 places and over 7,500 employees. It has almost 2,000 places in each of NSW and Victoria, with Queensland and South Australia making up the rest.

The business says it wants to keep growing with a program of capital investment to "increase capacity, and continually improve asset quality."

healthcare worker overseeing group of aged care residents at table

Image Source: Getty Images

WAM's optimistic view on the Estia Health share price

Two of WAM's leading investors were recently featured in a video talking about a few different topics.

Portfolio manager Tobias Yao called out Estia shares as an opportunity.

He said that the company has a "competent board and management team now".

Yao noted that the aged care sector has had a "very tough time" over the last few years after the aged care royal commission and also with COVID-19. But, he said that WAM believes "that's now behind us". Explaining the positive case for the ASX share, he said:

If you're an efficient operator in the aged care space there are a lot of opportunities from an M & A (mergers and acquisitions) perspective to acquire good assets at very attractive prices and at the same time we've seen quite a few large takeovers of aged care operating groups and we believe Estia itself is the target of potential acquisitions.

So, we think the intrinsic value is over $3 and currently the risk/reward looks to be very attractive.

If the Estia Health share price were to rise to $3 after a takeover offer, that would represent a potential rise of around 50%.

Recent performance

Estia Health recently made its own acquisition – it bought four residential aged care homes from Premier Health Care Group for $62 million, excluding stamp duty and transaction costs, funded by debt.

In the first quarter of FY23, its 'spot occupancy' on its mature home portfolio of 6,163 places, excluding the Burton expansion, was 92.3% at 31 October 2022. Average occupancy for the quarter was 91.7% for the ASX share compared to 90.6% in the second half of FY22.

The impact of COVID-19 has "continued to decline" during the FY23 first quarter. Total estimated incremental costs associated with prevention and response were $8.9 million for the quarter, compared to $13.4 million in the prior quarter.

It's expecting to see the industry benefit from higher occupancy as the impact of COVID-19 lessens and a reduction in new supply intersects with the ageing population. The number of people over 85 is projected to increase by 60% in the next decade.

Estia Health share price snapshot

Over the last month, the aged care company has dropped around 8%.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Opinions

Medical ASX share price fall represented by worried looking patient awaiting vaccine injection.
Opinions

Under $100, are CSL shares finally too cheap to ignore?

CSL shares are back below $100 after a brutal sell-off.

Read more »

Five arrows hit the bullseye of five round targets lined up in a row, with a blue sky in the background.
Opinions

3 unstoppable ASX shares to buy with $3,000

These investments have a very exciting future!

Read more »

A golden egg with dividend cash flying out of it
Opinions

Why I just invested $2,000 into this ASX share for dividend income

This business is delivering excellent dividends year after year.

Read more »

Buy and sell keys on an Apple keyboard.
Opinions

Brokers say these 2 ASX shares are highly undervalued — here's why I agree

I believe these ASX shares could deliver great returns.

Read more »

Two excited woman pointing out a bargain opportunity on a laptop.
Opinions

2 ASX 200 shares I'd buy today and hold for years

I think these ASX 200 shares could be great long-term options for investors.

Read more »

Two boys looking at each other while standing by the start line with two schoolgirls.
Share Market News

4 ASX 200 shares I'd buy with $5,000 this week

And they're all tipped to climb higher over the next 12 months.

Read more »

steps to picking asx shares represented by four lightbulbs drawn on chalk board
Opinions

Why I'm planning to re-invest my dividends into this ASX share this week

This business is exactly what I want to invest in...

Read more »

Hand holding Australian dollar (AUD) bills, symbolising ex dividend day. Passive income.
Dividend Investing

CGT tax changes may encourage investors into ASX dividend shares: Expert

Yield may become more important to some investors than growth, says this expert.

Read more »