By Paul Rickard

Long suffering shareholders in Primary Health Care might start to feel a bit better with the news that the Chinese are staking a claim. By long suffering, I mean shareholders who saw the stock peak at $13.25 at the height of the boom in 2007, and watched the stock hit a low of $2.13 in February this year.

Primary Health Care - 7/98 to 5/16 



But it is not just long term shareholders who have felt the pain. The last 12 months hasn’t been much better, as the following graph shows.

Primary Health Care - 5/15 to 5/16


Fortunately for shareholders, the stock has roared back into life following Chinese multi-national Jangho Group’s announcement on 17 March that it had acquired an 11.17% interest in Primary Health Care. It has further added to the stake, and on 6 April, confirmed it controlled 15.93% of Primary. Yesterday, the stock closed at $3.74, up 75% from its February low.

A tough year for Primary 

Until news of the Chinese bid emerged, 2015/16 could well have gone down as Primary’s “annus horribilis”. Take this roll call of events:

  • Lingering concerns about the Abbott Government’s plan to introduce a co-payment on GP services;
  • A freeze on bulk-billing rebates (no indexation for inflation);
  • Changes announced in MYEFO to the bulk-billing incentives for pathology and diagnostic imaging (the Government has subsequently announced a deal that will trade this off for some form of rent control);
  • The appointment of a CEO from outside the industry, Peter Gregg, raises eyebrows;
  • The effective exit of the Bateman family from the business - firstly with the death of Dr Edmund Bateman in September, and then the resignation of Henry Bateman in March;
  • CEO Peter Gregg attracts media attention due to an ASIC investigation into his former employer, Leighton Holdings (where he was the CFO);
  • A trading update last November warns that profits for FY16 will be down by 5% on FY15;
  • 1H16 results came in slightly worse than forecast with EBITDA down 6.1%, with Primary forecasting a full year result that would see underlying net profit down by between 3.4% and 7.6%. 

Thank goodness for the Chinese.

Will the Chinese be allowed to buy Primary?

Jangho is not new to Australia. Last year, they forked out almost $200m through an all cash takeover of Vision Eye Institute. How ophthalmic care fits in with some of other Jangho’s interests, which include building decoration and interior design, is not clear. However, the purchase in cash and subsequent acquisition of a stake in Primary suggest that it is a player not to be taken too lightly.

The interesting point about any takeover speculation is that assuming Jangho wanted to make a bid, would they be allowed to complete it? It is probably not through ACCC concerns, but more about whether the Australian public is ready for a Chinese company to own a huge Australian services business.

On last night’s close, Primary’s market cap was $1.95b. Big, but not that big. However, its reach into the Australian community is pretty material. 71 medical centres, 2,164 pathology collection sites and 146 diagnostic imaging sites. 

Given all the fuss about the Kidman Pastoral Group, I am just not sure whether the shock-jocks (and the people they speak for) are ready for foreign owned corporatised medicine on this scale.

What do the brokers think?

While the broker analysts are alert to the takeover speculation, it doesn’t always have an immediate impact on their valuation models. According to FNArena, they are neutral on Primary, but see it as fully valued and have a lower consensus target price of $3.42. Individual ratings are as follows:

The brokers have Primary trading on a multiple of 16.9 times FY16 earnings, and 17.4 times FY17 earnings. The forecast yield is a fairly unremarkable 3.4%.

Bottom Line

Given the multiples, patchy track record and on-going regulatory risk, I can’t see Primary as a buy. 

The shorters don’t seem too concerned about the takeover talk. Although it has come down, yesterday’s ASIC figures show that Primary is still one of the most shorted stocks on the ASX, with 9.85% of ordinary shares (or 51.3m shares) sold short.

Should long suffering shareholders get out (in many cases, cut their losses)?  Again, I am going to sit on the sidelines. Given the pain many have already taken, they may as well roll the dice and keep playing - it is unlikely that the takeover speculation is going to go away. The question that no-one can answer is how much takeover premium is already built into the price.

Disclosure: The author’s SMSF is a shareholder in Primary Health Care.