by Raymond Chan

Healthscope is the largest IPO in 2014 with proposed market capitalisation of $3.3 - $3.8 billion. CIMB is a Joint Lead Manager and Morgans is a Co Lead Manager to the Float.

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Our Site Visit and Feedback

Our adviser Anthony Hung has personally met the management team during a recent site visit to one of its operations (Knox Private Hospital in Melbourne) and a recent management presentation and was impressed by the sensible management team which has delivered both growth and margins expansion. It is undeniable that population is both growing and greying and putting pressure on the health system.

Anthony suggested: “There is no denying the macro fundamentals surrounding the healthcare space and the increase demand for hospital to service a growing and ageing population. The fact that Healthscope hospital covers every state and territory gives it good diversification and there is plenty of growth in margins to be achieved via procurement of consumables which are at a total cost of $300m p.a. Also the fact that it is receiving 5% less from health funds compared to Ramsay gives it room to catch up. The alignment of interest for employees shouldn’t be underestimated as turnover of staff has been significantly reduced since MD Robert Cooke has come on board and many of the hospital manager's have equity in the business.

In terms of labour, management expects there should be no breakout in wages as there is currently an oversupply of nurses especially in the suburban areas. There is little-to-no public hospital flow over work yet for Healthscope but the Victorian Government has announced it will be tendering $420m of public patient elective services over four years where Healthscope has the largest presence. The current tender for the construction and operation Frenchs Forest/ Northern Beaches hospital, if won by Healthscope could fuel growth from 2019. Also the forecast for FY15 numbers growth is coming from conservative organic numbers and does not include any top up payments from private health fund for hitting KPIs.

Yes, the pricing metrics seem expensive on a stand alone basis but you are getting a quality and reliable business with a strong board and management team with plenty of experience. It is however priced at a discount to all its peers in the Asian region.”

It’s a Core Portfolio stock

According to AFR, the IPO has been cornerstoned by sovereign wealth funds globally to the tune of $1.7 billion of the minimum raising of $2.2 billion and the final price will be determined by institutional bookbuild and ranging from $1.76 to $2.29, implying a FY15 PE of 20X - 23X (at discount to Asian and Australian peers) and yielding of 3 - 3.5 per cent. Please note that due to different industry dynamics we understand the US and European peers are trading at much lower multiples.

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Latte with Ray are of the view that Heathscope IPO is suitable for long term investors gaining expose healthcare sector, rather than professional traders chasing an IPO stag. Subject to the final pricing, we’re looking to include Heathscope to our Morgans Hunter Street - Model Core Portfolio.

Important Notice - Intending investors should read the Healthscope Prospectus dated 30 June 2014 to determine with an investment is appropriate for them. Applications for shares can only be made on the application form forming part of the Prospectus. Morgans is a Co-Lead Manager to the IPO and it and its advisors will receive fees in this regard.