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Taking a shot at IBA Health

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IBA - IBA Health Group

Company fundamentals

IBA is Australia's largest listed health IT company, providing IT solutions like financial and patient records management to hospitals and other healthcare providers. They operate mostly in Aus/NZ and UK/Europe, but also has small presence in US and middle East. They run a significant amount of development work out in India - the IT outsource capital of the world.

A number of positives to this share:
  • Relatively recession proof - with 94% revenue funded by public sector
  • Stable revenue - 94% recurring revenue this year, 60% the next
  • Market recognition - IBA is to be included in ASX200 on 20 Mar 09. This may garner new insto following
  • Growth in market - government stimulus packages in US and UK include large amounts to be spent on healthcare IT services

The rights issue

IBA announced on 12 Mar 09 to raise $124M of equity in a 2-for-7 rights issue at 55c a share (last trade 77.5c). Insto component ($77M) is fully committed, and the rest fully underwritten. The purpose of the fund is to retire debt.

Looking at the company accounts, they are retiring some of the most expensive debt in the world. The AEP subordinated debt (total $60M) charges a base rate (i.e. fixed) of 10% + 4.5% margin + 4% PIK + Warrants. Ouch! Even my credit card interest rate is below that. No wonder this debt retirement exercise is said to be EPS positive.

On my back of envelop calculations:

Current EPS = 3.6c, earnings ~$28.3M
Current shares outstanding = 787M
Total shares after rights issue = 1,010M
Saving in interest costs = $14.8M before tax, or $10.4M after tax
New total earnings = $38.7M
New EPS = 3.83c
My finance lecturer told us that debt is always cheaper than equity, as debt is above equity on the capital ladder. But in this case, is it possible that the really expensive debt can be replaced with equity at a lower cost? The numbers seem to suggest that to be the case.

The chart

IBA is in a sideway pattern over the last 12 months, with medium term resistance at ~80c and support at ~40c. You can probably argue about a triangle formation showing itself, but I cannot be absolutely sure.

Interesting to note on the chart that, IBA undertook a rights issue back in Jun 2006, and that sparked a nice SP rise for the ensuing 6 months (the overall bull market certainly helped as well).

The trade approach

I am guessing that the share price will definitely trade below the current price (77.5c) when it opens again, but above the issue price of 55c. There may be some selling pressure as people dump their 55c shares for a quick gain.

I am planning to take a long position if the share price falls substantially. The average PE over the last 3 months is ~18 (vs current PE 21.5). Based on the new EPS of 3.8c, I will probably enter if PE was to fall below that - this mean a target entry price of ~68-69c.

For stop loss, I will adopt a PE of 15 (SP ~57c). If this is reached, it suggests to me that the market has lost confidence in IBA to deliver the projected earning growth, or the overall market's risk appetite is fallen on the wayside. This also close to the rising trend line as indicated on the chart.

For target, I will probably take partial profit at the recent resistance of ~78c, and let the rest ride and test that resistance. R:R is ~1 for the 78c target, but reward is higher if the rest run past the resistance.

Note: Do not rely on any of this information for your own trading. I wrote this for my own record-keeping, learning and entertainment purpose only. Any or all of the figures could be wrong, incomplete, mis-interpreted or pulled from thin air. I may or may not actually enter the trade. I am not a financial advisor, borker, communist, porn star...etc.
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Updated 12th-March-2009 at 11:43 PM by skc

Australian equities


  1. babka's Avatar
    Thanks for an excellent post. Well done, and the fact that you are sharing it with others , is credit to you.
  2. skc's Avatar
    Thanks Babka.

    FYI I got into this at 66c


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