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<br>Price Sweetener</h2>
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<p><strong>NEUTRAL</strong></p>
<p>Abano&nbsp;Healthcare&nbsp;(ABA) provided two positive updates: (1) confirmation strong trading has continued, with FY21 guidance ahead of our (and market) expectations, and (2) a lift to the takeover offer price, via Scheme Implementation Agreement (SIA). The price was lifted to NZ$4.75/share (+30cps), to ensure it is within the independent report draft valuation range, with no change to the price adjustments (maximum of -NZ$0.75/share) if various adverse events occur (in place of termination rights). Given this, and board support, the transaction's barriers appear low, however, there is always some uncertainty in a takeover process.&nbsp;ABA's&nbsp;share&nbsp;price factors in a 60% weighting to the&nbsp;offer's&nbsp;risk adjustment; with upside of up to +10% depending how the backdrop (particularly COVID-19 restrictions) evolves over the duration of the SIA (likely to the end of CY20).</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/164/857/original/image_21342006321602548903816.png?1602548907" class="editor-image img-responsive" data-smartkarma-image-id="164857"></figure>
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<h3>What's changed?</h3>
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<li><strong>SIA offer price</strong>: NZ$4.75/share (+30cps), with downside of up to a maximum of NZ$0.75/share (unchanged) under various 'material adverse change' events &amp; situations (providing a floor price of NZ$4.00/share). The offer represents an FY21E EV/EBITDA (pre IFRS and wage subsidies) of c. 8x, materially below Australian dental corporate peers. However, substantially higher gearing (and the counterfactual of a meaningful capital raise) likely impacted the price the board was willing to accept.</li>
<li><strong>EBITDA forecasts</strong>:&nbsp;FY21E revised +8%, factoring in a faster recovery; small&nbsp;changes thereafter (FY22E +3%; FY23E +1%).&nbsp;</li>
<li><strong>Target price</strong>:&nbsp;NZ$4.49&nbsp;(prior NZ$4.00). This reflects the +30cps lift in the offer price and lower risk<strong> w</strong>eightings applied to the various potential adjustment events reflecting a shorter 'at risk' time period remaining and the COVID-19 status. Refer Figure 2.</li>
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<h3>Scheme update&nbsp;— shareholder vote likely in November, completion (if approved) targeted for December</h3>
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<p>The variation to the scheme is expected to impact the original draft timetable. However, subject to court approval the scheme is still likely to be put to a shareholder vote in November 2020. Should shareholders accept the scheme, the Implementation Date is targeted for no later than 23 December. Key outstanding conditions are: shareholder approval (75% of votes cast need to approve the SIA and over 50% of total shares on issue need to vote in favour) and other standard regulatory approvals (unlikely to be an issue).</p>
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<h3>FY21 on track to be a strong year</h3>
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<p>Fundamentals are unlikely to be the near-term focus. Nonetheless, dentistry has recovered quickly since re-opening of practices, likely helped by pent up&nbsp;demand and dentists (paid on commission) not taking leave.&nbsp;ABA's&nbsp;recent trading and first-time FY21 guidance is ahead of our prior expectations. We are expecting demand to soften, albeit timing and extent is still uncertain.&nbsp;</p>
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<div id="m_-5554481258400805078ip6oqw">
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<li><strong>FY21 underlying EBITDA guidance</strong>:&nbsp;NZ$32.0m (pre IFRS-16 and wage subsidies), which is only modestly below pre COVID-19 levels (-5% below FY19) despite various disruption from restrictions and almost three weeks of Auckland shutdown.</li>
<li><strong>Trading for the first four months of FY21</strong>:&nbsp;Strong, particularly for New&nbsp;Zealand&nbsp;(refer Figure 4). Other key metrics also show growth including new patient numbers (+10%), Lumino dental plan sign-ups and October forward bookings.</li>
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<div><strong>Chelsea Leadbetter CFA</strong></div>
<div><a href="mailto:chelsea.leadbetter@forsythbarr.co.nz" target="_blank" rel="noopener">chelsea.leadbetter@<wbr>forsythbarr.co.nz</a></div>
<div>+64 4 495 5262</div>
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Abano Healthcare Price Sweetener

NEUTRAL
Abano&nbsp;Healthcare&nbsp;(ABA) provided two positive updates: (1) confirmation strong trading has continued, with FY21 guidance ahead of our (and market) expectations, and (2) a lift to the takeover offer price, via Scheme Implementation Agreement (SIA). The price was lifted to NZ$4.75/share (+30cps), to ensure it is within the independent report draft valuation range, with no change to the price adjustments (maximum of -NZ$0.75/share) if various adverse events occur (in place of termination rights). Given this, and board support, the transaction's barriers appear low, however, there is always some uncertainty in a takeover process.&nbsp;ABA's&nbsp;share&nbsp;price factors in a 60% weighting to the&nbsp;offer's&nbsp;risk adjustment; with upside of up to +10% depending how the backdrop (particularly COVID-19 restrictions) evolves over the duration of the SIA (likely to the end of CY20).


What's changed?



SIA offer price: NZ$4.75/share (+30cps), with downside of up to a maximum of NZ$0.75/share (unchanged) under various 'material adverse change' events &amp; situations (providing a floor price of NZ$4.00/share). The offer represents an FY21E EV/EBITDA (pre IFRS and wage subsidies) of c. 8x, materially below Australian dental corporate peers. However, substantially higher gearing (and the counterfactual of a meaningful capital raise) likely impacted the price the board was willing to accept.
EBITDA forecasts:&nbsp;FY21E revised +8%, factoring in a faster recovery; small&nbsp;changes thereafter (FY22E +3%; FY23E +1%).&nbsp;
Target price:&nbsp;NZ$4.49&nbsp;(prior NZ$4.00). This reflects the +30cps lift in the offer price and lower risk weightings applied to the various potential adjustment events reflecting a shorter 'at risk' time period remaining and the COVID-19 status. Refer Figure 2.



Scheme update&nbsp;— shareholder vote likely in November, completion (if approved) targeted for December


The variation to the scheme is expected to impact the original draft timetable. However, subject to court approval the scheme is still likely to be put to a shareholder vote in November 2020. Should shareholders accept the scheme, the Implementation Date is targeted for no later than 23 December. Key outstanding conditions are: shareholder approval (75% of votes cast need to approve the SIA and over 50% of total shares on issue need to vote in favour) and other standard regulatory approvals (unlikely to be an issue).


FY21 on track to be a strong year


Fundamentals are unlikely to be the near-term focus. Nonetheless, dentistry has recovered quickly since re-opening of practices, likely helped by pent up&nbsp;demand and dentists (paid on commission) not taking leave.&nbsp;ABA's&nbsp;recent trading and first-time FY21 guidance is ahead of our prior expectations. We are expecting demand to soften, albeit timing and extent is still uncertain.&nbsp;



FY21 underlying EBITDA guidance:&nbsp;NZ$32.0m (pre IFRS-16 and wage subsidies), which is only modestly below pre COVID-19 levels (-5% below FY19) despite various disruption from restrictions and almost three weeks of Auckland shutdown.
Trading for the first four months of FY21:&nbsp;Strong, particularly for New&nbsp;Zealand&nbsp;(refer Figure 4). Other key metrics also show growth including new patient numbers (+10%), Lumino dental plan sign-ups and October forward bookings.





Chelsea Leadbetter CFA
chelsea.leadbetter@forsythbarr.co.nz
+64 4 495 5262




Abano Healthcare

Abano Healthcare: Price Sweetener