Ann: FY17 Financial Report Media Release, page-52

"Hi @madamswer, would you mind sharing your workings on how you calculated the 10x EV/EBITDA to correspond to a share price of $1.60? I've been working through some calculations based on the latest annual report but am only getting 12x EV/EBITDA based on the current share price of $1.65.

I used the following:
Share price: $1.65
Number of shares: 1,740.9m
Debt: $2,333.3m
Cash: $195.9m
EBITDA: $411.4m."


@jiantan86 ,

I think there are some reasons that I get a different EV/EBITDA metric to you.

Firstly, you are basing your maths on FY2017 numbers, i.e., you are deriving a "trailing" valuation multiple.

While that might help you sidestep the perils associated with the highly inexact science of forecasting, it overlooks the fact that the market is a forward-looking beast.

And, secondly, in the specific case of HSO, its June 2017 balance sheet reflects the significant investment being undertaken in new hospitals, notably the $550m having been invested to date, in the Norther Beaches Hospital, while FY2017 earnings base do not reflect the benefits of that capital investment.

So, really, you are not really making a like-for-like comparison.

Therefore, what you really should do - to maintain consistency - is reduce your debt by $550m. Otherwise the valuation gets unjustly punished.

If you re-run your exercise on a "matched" basis, you'll find that EV/EBITDA is close to 10.7x.

Because your analysis is backwards-looking, it omits to account for the future financial contribution of capital that has already been being invested.

Therefore, to counter this, what I have done is to take a stab at what EBITDA will look like once NBH has been commissioned.

After NBH is commissioned, NSW Health refund around $400m of the capital cost back to HSO, meaning HSO's share of the capital cost of the hospital will be around $250m.

Based on a conservative return of 10% EBIT-to-Assets from NBH, that will result in an extra $25m pa in EBIT for HSO. And assuming a 20 year depreciation rate on NBH's fixed assets (i.e. around $12m pa in depreciation for HSO's account), the incremental EBITDA will be around $37m.

So, on a pro forma basis to reflect the full financial effect from NBH (i.e., both on the P&L as well as on the balance sheet), HSO's EBITDA is around $411.4m + $37m, i.e., ~$450m.

Add back the effect of the ~$400m capital component refund from the state government, and pro forma Debt becomes ~$1.95bn, and Net Debt ~$1.75bn.

On that basis, and at the $1.60 share price, the EV/EBITDA multiple works out to be:

Pro forma EV/EBITDA = (Market Cap of $2.78bn + NIBD of $1.75bn)/(EBITDA of $0.45m)

Which is how I derived my 10X EV/EBITDA.