AVL – IF YOU BUILD IT THEY WILL COME

Advanced Health (AVL) is about to list on the JSE AltX at R1/shr and if it is able to achieve its stated objectives of tripling the number of Day Clinic facilities they operate the stock has the real potential to be a double on a conservative basis. The stock could go significantly higher if mgmt proves its execution skills & is able to capitalize on a secular shift in the Healthcare industry, in which case the 15x listing multiple is too cheap & AVL could be a multiple bagger

WHEN A 800LB GORILLA ASKS YOU TO DO SOMETHING YOU GENERALLY DO IT.

Looking for a way to control ever escalating hospital costs, Discovery Health has begun to incentivize specialists to treat their patients in day clinics rather than private hospitals. Ironically d.t. legacy healthcare insurance reimbursement policies that favoured private hospitals there is a dearth of Day Clinics in SA (45 vs 235 private hospitals, SA has 1 Day Clinic / 1.2mln ppl vs US & Aus which have 1:52k & 1:77k, respectively), this led to Discovery Health approaching AVL to encourage them to expand their Day Clinic portfolio in South Africa. AVL hence took the decision to raise R100mln (R20mln via private placement & R80mln via JSE Altx listing) to develop 10 new Day Clinics over the next 5-7yrs.

WHO ARE ADVANCED HEALTH?

Advanced Health was founded by Carl Grillenberger (CEO), who has since the early 1980s been a firm believer in the benefits of day surgery facilities. In the mid 90’s Carl established Presmed Australia which established 3 Ophthalmic day clinics. Along with Presmed Australia, Grillenberger controlled 2-day clinics in South Africa. Both Australia and South African operations have now been consolidated under Advanced Health.

Advanced Health currently has 5-Day Clinics, 3 in Sydney, Australia and 2 in South Africa.

AVL Clinics

Currently 90% of its revenues are generated out of Australia, ultimately AVL’s goal is for revenues to be split 50:50 betw Aus & SA

More info on Advanced Health & its management can be found in the prospectus here.

LISTING PRICE LOOKS REASONABLE IF NOT CONSERVATIVE

AVL plans to raise R80mln by listing on the JSE AltX (listing date 25th April / Closing offer date 17th April), in the form of 80mln share @ 100c/shr.

At the date of closing of the offer & assuming that it is fully subscribed, AVL’s share capital will comprise 1 000 000 000 authorised ordinary Shares of no par value and 210 831 414 issued ordinary Shares of no par value with stated capital of R210 831 414.

From the prospectus mgmt put forward the following Pro Forma numbers

PF Income Statement

PF Geo breakdown

  • In PF2014 the SA operations are only consolidated from 1 February 2014.

 Given these Pro Forma numbers AVL stock will list with a valuation of around 14.71x FY14 EPS, a discount versus its private hospital peers which seems reasonable given its size and execution risks.

Listing Valuation

THINGS START TO GET INTERESTING IN FY16

AVL has begin construction of 2 new clinics, a state of the art 5 theatre Ophthalmic clinic in Chatsworth, Australia scheduled to open in July 2015 and the Soweto Day Clinic, scheduled to open Feb 2015. While the Soweto clinic will contribute a little to revenues in FY15 (R3.5mln), it is in FY2016 where both facilities will make meaningful contributions to the income statement.

Making the following assumptions:

  • Organic growth of 10% (8% for Aus & 20% in SA)
  • Soweto Clinic generates R12.5mln in revs
  • Chatsworth Clinic generates R30mln
  • All margins remain stable

2016 IS

Applying a 15x multiple to FY16 EPS and discounting it back 2yrs gets you to a potential share price of R1.52, 50% upside form listing price. Given that ground has already been broken on these 2 facilities and the relevant licenses attained, the execution risk involved in new projects has been reduced to a certain extent. I am pretty sure the market will not give AVL credit for them until the doors are open and they are generating income, thus plenty potential upside exists when they come online.

EACH NEW FACILITY WORTH BETW 9 & 11c/SHR IN INTRINSIC VALUE

The whole essence of the listing is to raise capital to add 10 new clinics and triple the size of Advanced Health’s portfolio. While mgmt have been tight lipped on return details expected for each new clinic, we can use the few facts we have got and try get to a ball park figure (more an art than a science but I think gives one a good indication of potential.)

What we know from mgmt comments:

  • A clinic needs ~110 patients/ mth to breakeven
  • Mgmt use 200patients/mth in their analysis’
  • Mgmt believe that clinic can ave 15 patients/day
  • Clinics have the capacity to treat 350 patients / mth
  • Payback period betw 1-2 yrs
  • Ave Revs/patient for a SA clinic is about R8500
  • SA margins expected to be slightly higher than Australia (17%)
  • Capital costs/clinics = R10mln
  • 80/20 Equity : Debt. Interest on Debt @ 9%
  • Discount Rate 17% (CAPM RFR 8.5%, EMP 7%, beta 1.2x)

Incorporating this data I attempt to arrive at a value per clinic fewer than 3 different scenarios

Per Clinic DCF

Now assuming that AVL is successful in meeting its goal of opening 10 new facilities over the next 5 yrs (2 /yr), I run a consolidated DCF out to 2024 over the 3 scenarios above

Consolidated Clinic DCF

So if the market was to give AVL credit up front for their stated growth target that could conservatively add an incremental 60c-72c /shr.

 

One would be a fool to bet against the health insurance companies’ ability to steer patients to day clinics. Given the scarcity of day clinics in SA at present there is significant room for this market to grow for a long time to come. Ultimately AVL are will positioned to take advantage of this trend but it will all come down to AVL’s mgmt & whether they can execute to plan & take advantage of this secular shift in the health care industry.

 

IF YOU BUILD IT THEY WILL COME

 

 

 

 

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