The proposed acquisition of Arvida Group by US private equity firm Stonepeak injects “meaningful optimism” into the listed aged-care sector, Forsyth Barr’s research team says.
Earlier this week, it was revealed a $1.3 billion takeover offer had been made for the rest-home and aged-care company. The Arvida board and selected shareholders consulted on were recommending it be accepted.
In the report, the analysts said the aged-care sector was suffering from lack of confidence in the business model driven by years of weak cash generation, concerns around house prices and interest rates, and an overly negative outlook on care profitability.
While all issues were understandable, the analysts viewed them as largely backward looking.
“Cash generation is improving dramatically, debate on interest rates had turned from “up or down” to “how fast and how far down” and they believed the aged care names were a good 12 months into improving care profitability.
“What has been lacking is a catalyst and any apparent cost associated with waiting for even more confirmation that the aged-care sector has indeed turned the corner. Both appear to have arrived with M & A returning to the sector,” the report said.
The aged-care sector had performed well since the Reserve Bank signalled a more dovish stance earlier this month. However, that was from very depressed levels.
There was still room for strong performance in the sector and the analysts believed a reduced OCR, a macro backdrop improving from rock bottom, and demonstrating improved cash conversion of earnings could act as near-term catalysts.
