Sometimes your eyes and ears truly are the best investment tools. This week, I counted at least three large residential aged-care facilities under construction in my suburb and a couple in surrounding areas. One is a few blocks from my house – there goes the neighbourhood!
It is astonishing how much money will be made constructing aged facilities, providing services and care, and in the medical sector. Investors who have not increased their exposure to the stocks that benefit from an ageing population still have time. This trend has a long way to run.
Between now and 2050, the number of people aged 65 to 84 is expected to more than double, and those aged 85 or over will quadruple to 1.8 million. And almost a quarter of our population will be 65 or over, according to the Treasury’s 2010 Intergenerational Report.
Think about that for a minute. One in four Australians will technically be in retirement – or hoping to retire, if they have enough superannuation. More medical breakthroughs, and thus longer lives, could further swell those numbers. As trends go, an ageing population is hard to beat.
It’s no surprise there have been a smattering of healthcare floats in the past 12 months, with more on the way. Expected multi-billion-dollar offers for Medibank Private and Healthscope could lead to this year’s IPO market eclipsing previous capital-raising records.
Medibank and Healthscope are not direct plays on an ageing population, but both organisations have much to gain as more people spend up on medical insurance and health services. Three much smaller IPOs – Japara Healthcare, LifeHealthcare Group and Simavita – also have much to gain from an older population.
Japara soared 35 per cent on debut in April. The aged-care operator raised $450 million, in a heavily oversubscribed offer, to stgelop a business that has 3,000 beds across 35 facilities in Victoria, New South Wales and Tasmania, in a sector ripe for consolidation.
I like the look of Japara. It is not cheap; quality healthcare providers rarely are. Japara’s forecast earnings per share in the prospectus, 10.5 cents, puts it on a prospective Price/Earnings (PE) multiple of 24.7 times at the current $2.60 share price.
Direct valuation comparisons are problematic, given Japara is the market’s only pure Australian aged-care operator. Hospital operator Ramsay Health Care, much larger and more impressive than Japara, trades on a forecast PE of about 25 times FY15, consensus analyst forecasts show.
Japara’s New Zealand-listed peer, Ryman Healthcare, trades on a forward PE of 32 times, according to Morningstar, which has a “reduce” rating on the stock, on valuation grounds. Another NZ aged-cared operator, Summerset, trades on a trailing PE ratio of 28 times.
On that comparison, Japara looks okay, but I struggle to pay such a high multiple for a recently listed company that has soared on debut. Nevertheless, Japara looks a stock for long-term investors worth considering on any significant price weakness during a market sell-off in the next few months.
LifeHeathcare also impresses. It raised $76.6 million through an IPO, listed in early December, and was easy to overlook in the end-of-year float rush. Its $2 issued shares trade at $2.25.
Founded in 2006 through six acquisitions of medical-stgice companies, LifeHealthcare distributes high-end medical stgices in Australia and New Zealand and works closely with surgeons, hospitals, nurses and other medical specialists.
Implantable stgices such as orthopaedic and prosthetic products contributed just over half of FY13 revenue; 15 per cent of revenue came from surgical instruments, suction liners and bags used in surgeries; and 30 per cent came from ultrasound machines, specialist spine tables and other consumables.
Unlike medical-stgice companies that research, design and build high-tech stgices, LifeHealthcare mostly distributes products made by other companies. Its biggest asset is a team of 62 highly trained medical sales professionals who have valuable relationships with the surgeons and specialists.
LifeHealthcare has solid long-term prospects. The implantable-stgice market had compound annual growth of 7.7 per cent in Australia and 12 per cent in New Zealand over five years to 2018, according to the LifeHeathcare prospectus.
LifeHealthcare also has scope to expand into other markets and acquire smaller competitors in its fragmented market. I rate its industry position and its capital “lite” business model: it’s a solid company that will grow as the population ages and demand for orthopaedic and prosthetic products rises.
Although its shares are fairly valued at current prices, LifeHealthcare looks a solid long-term investment for portfolio investors who want exposure to medical-stgice companies, without the higher risk of backing emerging lifescience companies. LifeHealthcare offers the best value of recent healthcare IPOs,
The final aged-care-related IPO, Simavita, is much smaller and speculative. It raised $1.1 million and listed in February 2014 at 41 cents a share. Simavita soared to $1.10 soon after listing, before retreating to 48.5 cents.
Simavita is stgeloping technology to manage urinary incontinence. Its product, targeted at the elderly, will help residential aged-care facilities stgelop incontinence management care plans for sufferers – sadly, a growth market if ever there is one.
Investors could easily overlook Simavita in this market or lump it with other emerging lifescience companies that are years from commercialising their product.
Its SIMTM Generation 4 has been successfully launched in Queensland, NSW and Victoria and the company expects to ramp up sales of its technology from May 2014, having received encouraging early support from its sales channels.
It is a stock to watch for investors comfortable with higher risk, and may get cheaper in the new few weeks, amid the global sell-off in technology stocks.
Tony Featherstone is a former managing editor of BRW and Shares magazines. This column does not imply stock recommendations. Readers should do further research of their own or talk to their adviser before acting on themes in this article. All prices and analysis at April 30, 2014.
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