Monday 19 June 2017 by FIIG Research ripples_on_water Company updates

Capitol Health signals its intent to call its notes – investors to earn close to 10% per annum


Capitol Health has announced it intends to call its 8.25% bonds in May 2018, following its agreement with I-Med Radiology to sell its NSW radiology assets for a total of $81.5m


Capitol Health Ltd (Capitol) has entered into an agreement with I-Med Radiology Network (I-Med) to sell its NSW radiology assets for a total consideration of $81.5m. Post the sale, the group expects to be in a net cash position and has stated its intent to call the 8.25% notes in May 2018 ($103 call price). For investors who bought the notes on issue this would equate to an excellent return of 9.88% per annum, 1.5% more than expected.

Key points:

  • Capitol has entered into a binding all cash agreement with I-Med to sell its NSW radiology assets for a total consideration of $81.5m. The parties expect the transaction is likely to complete on or around 31 August 2017
  • The transaction is subject to Foreign Investment Review Board (FIRB) approval. I-Med is owned by Swedish private equity group EQT. According to The Australian, I-Med is the largest business in the national diagnostic industry with a 15.6% share. Capitol’s NSW radiology assets represent around 1% to 1.5%. We expect the deal to be approved by FIRB
  • Upon completion at the end of August 2017, Capitol expects to be in a net cash position. It estimates it will have a cash balance of ~$100.0m and total debt of $55.8m
  • Capitol states that it ”plans to exercise its right to buy-back the Unsecured Notes in May 2018 subject to its ability to obtain any necessary alternative funding”. If this occurs in May 2018 at the $103 call price, this would equate to an annual return of 9.88% for investors who purchased the notes on issue in May 2016
  • The group will also begin shareholder friendly activity including an on market buy back to acquire up to 52.3 million shares (At the current price of 26 cents this would equal $13.6m). In addition, Capitol may seek shareholder approval to buy-back further shares and intends reinstating dividends in respect of the 2018 financial year. The 8.25% notes restrict the payments to shareholders above 75% of NPAT. The refinance of the notes would obviously remove this restriction
  • Capitol expects FY17 Core radiology EBITDA to be ~$21.5m (FIIG forecast: $18.3m) and FY18 EBITDA to be in range of $19.0m to $21.0m post the transaction (FIIG forecast: $22.3m pre transaction)