Analyst Note | by Shane Ponraj Updated Feb 19, 2024CVC Asia...

Analyst Note | by Shane Ponraj Updated Feb 19, 2024

CVC Asia Pacific made a nonbinding offer to acquire no-moat APM for AUD 1.60 cash per share. While good news for APM shareholders, at a 93% premium to the last close, we think the offer price undervalues APM as a stand-alone business, representing a 33% discount to our unchanged AUD 2.40 fair value estimate. We agree with the APM board that has unanimously resolved not to pursue the proposal on the basis it undervalues APM. Despite this conclusion, we surmise the market has caught wind of APM’s long-term fundamental value and is possibly waiting for further developments.While APM is currently operating in a challenging environment, cyclicality is inherent in the business, and we remain confident in the medium-term outlook. Several headwinds are currently weighing on group profitability, including wage inflation, APM being unable to attract and retain allied health professionals with tightness in the labor market, and abnormally prolonged low levels of unemployment, resulting in depressed client flows and fees.However, we think the market is too myopic, and pressures are likely to alleviate with unemployment gradually rising. From a valuation perspective, we would have to assume EBITDA margins holding flat at 13% in perpetuity to justify the current share price, and we think this is unlikely. This is relative to its trailing three-year average EBITDA margin of 21% and our forecast 10-year average of 17%.APM has a strong track record of achieving superior service levels across contracts, which allows it to build on its significant market share. We maintain our forecast five-year group revenue CAGR of 8% as recent acquisitions annualize and the company services new contracts.