Aged care facilities company Estia Health Ltd (ASX: EHE) jumped to a near one-month high as the company is well poised to beat its prospectus forecast following its latest acquisitions.
Shares in the newly listed company advanced 4% to $6.04 in late afternoon trade in response to the announcement that it has bought four aged care facilities in Victoria with management indicating that there will be more acquisitions to come.
The latest transaction brings 323 extra spaces to Estia's existing portfolio and takes the total number of operating places to 4,383. This is 873 places more than was forecast in Estia's prospectus when it listed in December last year.
While no financial details were released, management said it has paid a total gross price of $181.1 million for the extra 873 places and that the return on capital employed is estimated at 27.5%. This is roughly in line with its guidance and management aims to add between 500 and 1,000 beds a year.
The acquisitions have been funded by existing cash and debt facilities and Estia now has 53 facilities under its care and management said it has successfully integrated 13 single facilities since October 2014.
This is important because it is a lot easier to find and acquire single facilities compared with buying a network.
Estia's growth model isn't dissimilar to childcare education centre owner G8 Education Ltd (ASX: GEM), which has come under pressure due to competition for assets, which is crimping its acquisition pipeline.
But consolidation in aged care is not as mature as childcare and this means Estia should still be able to find well priced facilities in good locations for a while yet, particularly single facilities.
The company's prospectus underlying net profit forecast for 2014-15 is $42.6 million. This implies that Estia is trading on a price-earnings multiple of 25.7x for the previous year.
That may look high but it compares well to other successful roll-ups like G8 Education or pet care group Greencross Limited (ASX: GXL) for this part of its life-cycle.
There's no consensus data on Estia, but I suspect it can deliver double-digit earnings per share growth for the next few years.
This should make the stock attractive on a valuation basis, but I always recommend applying a discount to roll-up models because I value organic growth above growth by acquisitions. You need only look at how other roll-ups have traded to understand why you need to be careful about paying a premium.
Estia probably trades close to 20x for the current financial year and the P/E will need to drop to around 15-16x before I become interested.
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