Veteran investment banker and private investor David Kingston has slammed Quadrant Private Equity's float of aged care operator Estia Health, calling it over-priced and opportunistic, and casting doubt on its profit forecasts.
Mr Kingston, the founder of K Capital and former Rothschild managing director, said Quadrant cynically exploited investor interest in aged care.
The $1 billion initial public offering on Friday was the third aged care operator to float this year after Japara Healthcare and Regis Healthcare, but it failed to live up to the hype. The stock fell 17.6 per cent on debut, making it the worst large float of the year. "The general expectation was this would come to the market in 2015 but with Regis and Japara trading so well it seems somewhat cynical that the IPO was expedited to exploit a market window," he said.
Estia rose 3.8 per cent on Monday to $4.92, still below the $5.75 offer price.
Quadrant first agreed to buy the Victoria-based operator Estia in June 2013. It merged South Australian operator Padman Health Care and Queensland and NSW-based Cook Care in October.
Mr Kingston said it was unclear from the prospectus how much Quadrant paid for the three businesses and why it floated with a market value of over $1 billion.
Quadrant director Marcus Darville said the total debt and equity invested in Estia was actually about $650 million. He argued the subsequent valuation boost was in line with similar increases for good healthcare stocks, in the same period. "Estia is an ungeared asset with a proven acquisition capability, which has got significant value," he said.
Quadrant completed the book-build more than a week prior to Estia's debut, and in the intervening time the market was spooked by Japara's admission of a $5 million payroll blunder, he said.
After Japara listed with a market capitalisation of $525 million in April, Regis was the next aged care IPO in a $1.1 billion listing in October.
Mr Kingston queried whether Estia could hit its 2015 earnings forecasts, which throw up some "anomalies" when compared to Regis the company he said was the best of the listed outfits. Regis has 4719 operational places, compared to Estia's 3613. Based on both companies' forecasts for 2015-16, Regis has a sales to earnings before interest, tax, depreciation and amortisation margin of 20.3 per cent. Estia's forecasts suggest a sales to EBITDA margin of 23.7 per cent.
"Estia are forecasting a far superior sales to EBITDA margin than the market leader Regis and also a much lower depreciation charge," he said.
Estia has forecast a pro-forma net profit after tax in 2015-16 of $42.6 million, compared with $48 million for Regis. Mr Kingston, who is not linked to any of the IPOs, said the comparison was extraordinary on the basis that "Regis has approximately 30 per cent more beds and 30 per cent higher revenue".
RBS Morgans analyst Scott Power said Estia was trading at a discount to Regis, but added this was appropriate because Regis was the "number one player in terms of their systems and processes." Estia is trading at 17.3-times its forecast 2015-16 earnings. Regis and Japara are trading on 24.2-times and 19.4-times respectively.
Mr Power, whose broking firm worked on the two other IPOs but not Estia, said the large day one fall could be a reflection that the float required a much larger capital raise of $725 million compared to raises for Regis ($486 million) and Japara ($450 million). "You would have needed a pretty solid book sitting behind it," he said.
UBS, Deutsche Bank and Morgan Stanley marketed the Estia float.