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Mediclinic - "Spire offers opportunity" 23/10/2017

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Spire Healthcare Group PLC has swatted away a possible offer from Mediclinic to acquire the shares it does not already own. Spire is a 29,9% associate of Mediclinic. Question is, could this prompt a revised offer? There is opportunity to be had. 

“Spire offers opportunity”

Mediclinic

Sector: Healthcare

Share price: R113,08 JSE

Share price: £6,27 LSE

Net shares in issue: 737,2 billion

Market cap: R83,4 billion

Market cap: £4,6 billion

Forward PE year one: 20,0x

Forward PE year two: 17,0x

Dividend yield 1,3% 

Fair value: up to £7,00 or R126 at R18,00/£

Trading Buy and Portfolio Buy

TWEET THIS ANALYSIS

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Mark Ingham's Fundamental analysis 

What you need to know:

TWEET THIS ANALYSIS

Spire Healthcare Group PLC has swatted away a possible offer from Mediclinic to acquire the shares it does not already own. Spire is a 29,9% associate of Mediclinic. Question is, could this prompt a revised offer? There is opportunity to be had. 

The offer comprises 150 pence in cash and 0,232 new Mediclinic shares for each Spire share. At the 17 October closing price, the day prior to the proposal being made, this valued Spire shares at 300 pence per share or £1,2 billion. This is a 30% equity premium to the price pre-offer. Essentially, it is a 50/50 cash and scrip deal.

At this level, the residual 70% would be valued at £840 million or R15 billion.

Mediclinic has a market capitalisation of £4,7 billion on the London Stock Exchange, the primary listing of Mediclinic.

The independent directors of Spire, excluding Danie Meintjes, the Mediclinic CEO, turned down the proposal because it "significantly undervalues Spire". What else would you expect them to say?

But giving a bit extra, say 10%, would be worth it and relatively affordable if paid for in additional scrip. Mediclinic acquired the interest of 29,9% for £437 million in 2016 when the price in pence was much higher. Even if it went to say 330 pence it would be getting it cheaper than the original stake, whilst the pound has fallen post the Brexit referendum.

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Spire is a profitable business. I estimate EBITDA of £160 million for the year to December 2017 with after tax profit at £75 million.

Assuming EPS of 19 pence for 2017, the PE multiple at a share price of 300 pence is 15,8x. At the current share price of Mediclinic, the forward Group PE is 20,3x. Even if Mediclinic made 330 pence offer, including shares, the PE of 17,4x is still less than the current Group PE. I also think that any possible short-term EPS dilution could be minimised with the right mix of cash and shares. 

Moreover, in a post Brexit scenario, and with reduced labour movement to Britain and focus on healthcare efficiencies, Spire is well positioned. Spire has experienced good growth in self-pay and in NHS business. 

Recommendation:

TWEET THIS ANALYSIS

Mediclinic has until 20 November to make a firm intention offer or not. Until then, we are likely to see short-term weakness in the share price.

The stock has already wilted post the Brexit referendum on 23 June 2016, when the share price was relatively stable at around the £9 mark. The JSE price has been accentuated by currency gyrations too. I observed previously, that healthcare had been pricing in a bit too much “defensiveness” at one point but at current levels hospital stocks are looking reasonable value for money.

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With Mediclinic in London at 627 pence, the one year forward PE is 20,0x and the two year forward PE is 17,0x. The Group’s dividend policy is to target a pay-out ratio of 25% to 30% of underlying earnings so that indicates around 8 pence this year.  

A fair value of up to 700 pence is justifiable if I assume that the Middle East recovers lost ground. If EBITDA margin recovered to 20% in the Middle East, in line with Switzerland and South Africa currently and with what the legacy Middle Eastern business has historically achieved, then up to 10 pence per share in earnings could be added back. 

Lower levels are attractive for fresh money. This is a solid business with reliable cash flows, much of which is in hard currency. Remgro is the anchor shareholder at 44,5%. 

Trading Buy and Portfolio Buy maintained.   

Wishing you profitable investing, until next time.

Mark N Ingham     

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