New Zealand Professional Investment Services Firm

Forsyth Barr

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Abano Healthcare Group</h2>
More Clarity on&nbsp;COVID-19
NEUTRAL
Abano&nbsp;Healthcare&nbsp;(ABA) has provided early insights into the potential impact of the temporary closure of its dental&nbsp;practices,&nbsp; with the downside partly offset by a range of measures being taken (as expected) to lower cash burn. The release broadly aligned with our prior expectations, although incorporated a slightly longer period of closure.&nbsp;Pre&nbsp;COVID-19,&nbsp;ABA&nbsp;was a business under pressure from weak/negative same-store sales growth;&nbsp;COVID-19 adds further near-term challenges. This, and elevated gearing, is not lost on the share price which has sharply de-rated. Retain NEUTRAL.
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/128/871/original/image_98591058621587428872538.png?1587428878" class="editor-image img-responsive" data-smartkarma-image-id="128871"></figure>
Further insights into steps being taken to manage cash burn during temporary closure
Changes being made&nbsp;to reduce cash burn while its dental&nbsp;practices&nbsp;are closed (except some offering emergency care) include:
<ul type="disc">
<li>Cut to management and board remuneration:&nbsp;By -20% for the next three months. No short-term incentives or discretionary bonuses will be paid in FY20.</li>
<li>Accessing government subsidies for its workforce:&nbsp;According to the government site this totals&nbsp;~NZ$5m in New&nbsp;Zealand&nbsp;(760 employees for 12 weeks) and we estimate ~A$18m in Australia (~900 employees for six months).</li>
<li>Cancelling or deferring non-essential&nbsp;capex&nbsp;and&nbsp;opex</li>
<li>​​​​​​​Seeking rent relief from landlords:&nbsp;It is difficult to conclude what flexibility this may provide (not helped by likely &gt;200 discussions given its network is predominantly leased through individual parties), albeit we expect to see a material reduction.</li>
</ul>
First time guidance on what to expect in FY20; thereafter, near-term path to recovery no clearer
ABA provided FY20 EBITDA guidance of NZ$17m (pre IFRS16), incorporating closure of its practices from mid-March into May 2020. New Zealand's current Alert Level guidance suggests re-opening could be sooner, although we expect initial footfall will still be low even as restrictions are relaxed. ABA's guidance implies an EBITDA loss of c. NZ$3m/month during closure, by our estimates. ​​​​​​​Dentistry is a domestic focussed, relatively defensive industry that we expect to recover post lockdown, although it is unlikely to be fully immune to an economic downturn. However, the pathway to recovery will likely take time and is contingent on the virus trajectory, government policies around restrictions and consumer behaviour as restrictions ease. This remains difficult to forecast.
Balance sheet offers limited flexibility; confirmation near-term dividend likely to be a casualty (as we previously expected)
ABA&nbsp;has net debt of NZ$130m, with headroom of&nbsp;~NZ$33m.​​​​​​​&nbsp;The company's release indicated "constructive discussions with its banking partner to provide for future requirements" and that it "is looking to put in place arrangements to ensure the company has sufficient resources to get beyond the impacts of&nbsp;COVID-19".&nbsp;It is likely&nbsp;ABA&nbsp;will breach bank covenants due to the temporary closure, however, we expect banks may be more accommodating of a short-term breach in current circumstances. Nonetheless, there is potential the board decides to raise equity to de-risk the balance sheet through this period of heightened uncertainty.&nbsp;​​​​​​​ABA's&nbsp;release also confirmed a dividend is unlikely in FY20 and FY21, consistent with our prior forecasts.
Chelsea Leadbetter CFA chelsea.leadbetter@forsythbarr.co.nz +64 4 495 5262

Abano Healthcare Group
More Clarity on&nbsp;COVID-19
NEUTRAL
Abano&nbsp;Healthcare&nbsp;(ABA) has provided early insights into the potential impact of the temporary closure of its dental&nbsp;practices,&nbsp; with the downside partly offset by a range of measures being taken (as expected) to lower cash burn. The release broadly aligned with our prior expectations, although incorporated a slightly longer period of closure.&nbsp;Pre&nbsp;COVID-19,&nbsp;ABA&nbsp;was a business under pressure from weak/negative same-store sales growth;&nbsp;COVID-19 adds further near-term challenges. This, and elevated gearing, is not lost on the share price which has sharply de-rated. Retain NEUTRAL.

Further insights into steps being taken to manage cash burn during temporary closure
Changes being made&nbsp;to reduce cash burn while its dental&nbsp;practices&nbsp;are closed (except some offering emergency care) include:

Cut to management and board remuneration:&nbsp;By -20% for the next three months. No short-term incentives or discretionary bonuses will be paid in FY20.
Accessing government subsidies for its workforce:&nbsp;According to the government site this totals&nbsp;~NZ$5m in New&nbsp;Zealand&nbsp;(760 employees for 12 weeks) and we estimate ~A$18m in Australia (~900 employees for six months).
Cancelling or deferring non-essential&nbsp;capex&nbsp;and&nbsp;opex
​​​​​​​Seeking rent relief from landlords:&nbsp;It is difficult to conclude what flexibility this may provide (not helped by likely &gt;200 discussions given its network is predominantly leased through individual parties), albeit we expect to see a material reduction.

First time guidance on what to expect in FY20; thereafter, near-term path to recovery no clearer
ABA provided FY20 EBITDA guidance of NZ$17m (pre IFRS16), incorporating closure of its practices from mid-March into May 2020. New Zealand's current Alert Level guidance suggests re-opening could be sooner, although we expect initial footfall will still be low even as restrictions are relaxed. ABA's guidance implies an EBITDA loss of c. NZ$3m/month during closure, by our estimates. ​​​​​​​Dentistry is a domestic focussed, relatively defensive industry that we expect to recover post lockdown, although it is unlikely to be fully immune to an economic downturn. However, the pathway to recovery will likely take time and is contingent on the virus trajectory, government policies around restrictions and consumer behaviour as restrictions ease. This remains difficult to forecast.
Balance sheet offers limited flexibility; confirmation near-term dividend likely to be a casualty (as we previously expected)
ABA&nbsp;has net debt of NZ$130m, with headroom of&nbsp;~NZ$33m.​​​​​​​&nbsp;The company's release indicated "constructive discussions with its banking partner to provide for future requirements" and that it "is looking to put in place arrangements to ensure the company has sufficient resources to get beyond the impacts of&nbsp;COVID-19".&nbsp;It is likely&nbsp;ABA&nbsp;will breach bank covenants due to the temporary closure, however, we expect banks may be more accommodating of a short-term breach in current circumstances. Nonetheless, there is potential the board decides to raise equity to de-risk the balance sheet through this period of heightened uncertainty.&nbsp;​​​​​​​ABA's&nbsp;release also confirmed a dividend is unlikely in FY20 and FY21, consistent with our prior forecasts.
Chelsea Leadbetter CFA chelsea.leadbetter@forsythbarr.co.nz +64 4 495 5262

Abano Healthcare Group: More Clarity on COVID-19