Econ Healthcare (Asia) Limited
Econ Healthcare (Asia) Limited ("Econ" or the "Company") is offering 50m shares at Singapore 28 cents each for its upcoming IPO of which 48.2m shares will be through placement and 1.8m shares for the public. The market cap based on the IPO price is around $72m. The IPO will close on 15 April 2021 on 12 noon and commence trading on 19 April, 9am.
According to the prospectus, Econ is the largest private nursing home operator in Singapore and Malaysia and is going to commence operations for its first nursing home in Chongqing, China. The Company is also appointed operator for two upcoming medicare centres and nursing homes in Henderson and Jurong East.
Revenue and profitability has been on a steady decline since FY2018 and the 6M2021 numbers are "skewed' by grants given by the Singapore government. The current year 6M2021 has been "artificially boosted" by grants such as Job support scheme, staff accommodation, and foreign work levy rebates. WIth a new pipeline of centers coming up, there is a possibility that the trend might be reversed.
Using FY 2020 adjusted EPS of 1.57 cents, the historical PER based on the IPO price is around 17x. Assuming the EPS for FY2021 is around 2 cents, that will translate into a 14x PER. Based on the average of 1.57 cents to 2.13 cents over the last 3 years of 1.8 cents, the PER is around 15.6x. This compares well against the PER of listed healthcare stocks, which typically trades above 18x.
What I like about the Company
- Favourable demographics tailwinds - with an aging population and increasing acceptance of aged care facilities in Singapore, this model can be replicated in both Malaysia and China. Otherwise, SPH wouldn't have acquired Orange Valley for $164m in 2017
- Strong operational track record - Econ has been in this business for 30 years and the average occupancy rate for the last 3 years is more than 80%. This business is pretty "sticky" as the patients don't usually change from one care center to another
- Dividend paying and listing valuation in line with market - The Company intends to distribute at least 35% of its net profit after tax attributable to shareholders for FY2021 to FY 2023. Using a simplistic 2 cents x 35%, the payout translates into a yield of 2.5%. Based on the book value of 13 cents, investors are buying into this Company at a book value of 2.15x. Close to the 2.3x SPH paid for Orange Valley but that was done a few years back, and did not account for asset inflation.
Some of my concerns
- Delisting and relisting storyline (again) - The Company was taken private by founder and EQT in 2012 and the partnership didn't work out, resulting in EQT selling back its shares to the founder in 2016. Econ is following the footsteps of Aztech to list the Company, is history going to repeat itself in future?
- Understaffed and overworked nurses, leading to patients being neglected - There had been cases of abuses by nurses and manpower shortages, especially where patients in nursing homes have been found to be vulnerable. See prior cases here.
- Econ's ability to penetrate the China market is yet to be proven - The Chongqing nursing home is its first foray into China and has a capacity of 44 beds. This is relatively small compared to the facilities in Singapore and Malaysia. You can say that the strategy for China is still "unproven". The Company has entered into JVs in Chengdu and Changshou which are scheduled to commence operations in 2022. The vision is to expand bed capacity to 2000 beds by 2025
- Tight ownership structure - Similar to Aztech, the founder holds a majority of the shares, controlling 80.5% of the company. Can't these Chinese towkays be more generous with sharing their wealth with employees who have contributed?
- Government policies and "competition" - with an aging population, the biggest "competitor' to Econ could actually come from the government, especially if the government wants to provide high quality aged care at reasonable prices for the masses (for re-election purposes). This to me, will be the biggest unknown and a double edged sword. There is still "hope" if the government decides to outsource the operation of these centers to private operators but if they took the path similar to CPF Life, all the private annuity providers locally were "wiped out"
There are no listed peers on SGX although you can find more direct comps trading in the US at much higher valuation. At 2.15x book value, the company is reasonably valued, considering the last acquisition of 2.3x by SPH was made in 2017.
Considering the listing PER of 14-17x, the valuation of Econ Healthcare seemed fair as well.
Assuming a price to book of 2.3-2.5x, the fair value of the stock should be between 30-32 cents. Assuming a PER of 16-20x for healthcare nursing stocks, and an adjusted PER of 2 cents, the fair value should be between 32 to 36 cents.
I will give it a 2 Chilli Ratings. The valuation is priced reasonably with an auspicious 28 cents and strong demographics tailwind. Private nursing care will become more acceptable, if you follow the trends in Japan. Having said that, the biggest "worry" for this Company will be "competition by government-related" entities.
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