ORPEA valuation BY bug21121 Company’s presentation Created in 1989 by Doc. Jean Claude MARIAN, ORPEA began one of the most important leader in Europe in managing dependence’s people through a specialized network of establishments. Involved in five different countries (Switzerland, Belgium, Italy, Spain, and France its original market) with 70 establishments with retirement homes, but also clinic for care, treatment and psychiatric clinics since 1999. In 2002, Doc. MARIAN choses to put ORPEA in the French stock exchange because of the limit of its equity.
After 1 5 years of internal growth, ORPEA chooses the acquisition strategy to develop the group in the whole continent. With a revenue of 1,429 billion of euros, ORPEA is one of the European leader in the dependence market (retirement home, care, treatment, etc… ). The main mission of ORPEA is to always increase their personalized management of patients, in a qualitative way and not a quantitative. This was made possible because of the highly training of the personnel, and a continuous assessment of the staff. With a compounded annual growth rate of the revenue of 15. %, a CAGR of the net income of 14. 3%, ORPEA and an organic growth rate of 17% per year, is a fast growing company in the dependence market. In this strategic analysis we will discuss about the strategy of development that ORPEA wants, the environmental analysis, what could impact negatively or positively the company, and also make a comparison with the three main competitors. Strategic analysis I/COMPETITIVE ANALYSIS: porters 5 forces Since 2012, the French government made a new pricing system based on the activity called T2A. This new pricing system is to finance health care facilities.
In other terms, it means that for one specific activity, the total amount that the client has to pay is almost the same in all the different hospitals or clinics. As ORPEA gives a high quality of services, the T2A is a threat for them. This pricing system will affect especially the short term hospitalizations or specific operations, which is still representing a big amount of the total revenues. Another point which is a threat for ORPEA, is the rise of the home assistance. Many companies like LVL Medical (located in the whole Western Europe) is a real competitor of ORPEA.
These kind of companies are treating small re-education by taking all the material that they need into their client’s house, which it could be better for them because they do not have to move, and they can stay in their house, with family, etc… 2) Threat of New Entrants The risk of seeing new entrants in this sector, or multiplication of new establishment of our competitor is in fact really limited. Indeed, in France, the law about medical facilities is really strict and tough. That is why, the best strategy to take is to acquire some establishment already open by some competitors. 3) Bargaining power of Suppliers
Thanks to the maturity of this sector, many software and equipment are becoming much more negotiable. Moreover, ORPEA is using the same materiel as they are using in hospital or medical center which implies that they are already in the market, so the companies like ORPEA have a better power of negotiation. Plus, in this sector, there is no fashion or trend, all that the companies want is an efficient material. 4) Bargaining power of Clients Again, in this sector, the clients does not have a really power of bargaining. The clients are coming for a long period of time, or Just for an adapted re-education.
So as the public hospitals are doing the strict minimum for their clients, in private establishments, they really do care about them and offer the best service as they can. That is why, we can see that the price of these services is really high and the client has to choose between the public services and the private one. 5) Rivality against existing competitors As we can see in this pie chart, half of the establishment are owned by the public sector. As medical care are free in France, the government is agree to have many private establishments, in order to reduce the current debt of the country.
As in France, the social debt represent 63% of the total amount of debt, the government has to authorize few companies to have medical care facilities. But as we saw before, the law are really strict, so the number of competitors in this sector is smaller than in other sectors. That’s why, the market is now on maturity, and stagnates. Strenghts Weaknesses – European leader in its sector – Know-how in the service person (23 years of expertise). – Recent and modern health facility – Good control procedures and protocols – Diversified home offers. – Control of human and relational aspects Strong quality policy – External evaluation process. Therapeutic activities and varied entertainment – Lack of professional ethics. – High accommodation rates – Public policies and plans that promote public organizations. – 5 to 10% of the medical equipment need to be refurbished – The paramedical population is geographically uneven – Creation of new institutions, too low compared to the sector. – Regulatory risks. – Commercial risk and image Opportunities Threats – Strong increase in the very old population. – Increase in chronic diseases. – Increased accidents A strong need in other ORPEA’s implantation country. A strong regulatory framework for the sector that restricts competition – National and international competitors – Need investments – Bed’s offer is insufficient – Positive growth of medical and specialized health care facilities. IWANALYSIS OF SWOT & PESTLE: Key success Factors After creating this SWOT analysis, we can easily highlight the Key Success Factor of the company. As we can see, the price is not the only differentiation criteria of ORPEA, but also the quality of the services. Indeed, the strong positive point of the company re the modernity, the aftercare of the patient, and all the intern services.
So in fact, the real key success factor is based on the human relationship. ORPEA is offering to its patient medical services, but also the support and the care that employees are giving to them. They are doing their best (and doing it well) to make a good ambiance and atmosphere in the establishments that allow patient to care less about the actual reasons for their presence in there. Moreover, as a key success factor, we can say the good branding that ORPEA has. In this sector, as the European leader, ORPEA as a know-how that is recognized all over the continent which is important for our analysis.
However, the cost of this service is very high, due to its high quality service, and park equipment quickly becomes obsolete. It therefore becomes necessary to replace a part of it. From an external point of view, the increase of the elderly is a major asset, moreover, OREPA could expand out of the Europe and extend its strategy in many other countries. But, on the other hand, the company needs cash for new equipment, and extra beds as well. But they have to be careful of the various egislation (French and foreign) that are voted, and could sign the no-reimbursement of private clinics and health care facilities.
Thanks to the PESTLE matrix, we can see that in the technological part, no innovation is possible or feasible because of the expensive costs of the equipment. A very important point is that the cost which is connected to the current economic environment, which reduces the growth of the sector because of its price. Valuation l/ Beta Estimation To determinate the Beta of ORPEA, we decide to choose the monthly closing price of its share, for the last 5 years. It is giving us 61 data, which is enough for this company. We took the last 5 years of its market price, because the past years could not be as relevant as wanted.
Indeed, ORPEA is paying dividends since only 5 years, and so we can have the best risk indicator as possible. As we can see in the graph below, the variation of ORPEA’s share price is mostly following the variation of the index EURONEXT 100. These small differences of variation can explain the low Beta that we have found. the variance of the same data. At the end, this is our results: So, we have a Beta equal to 0. 5156 II/ Capital Asset Pricing Model For doing the Capital Asset Pricing Model, we have to take 3 different data.
The first one the Beta, compute Just above, and now, we need the Market Risk Premium, and the Risk Free. For the Market Risk Premium, we chose to take it from M. DAMODARAN’s website, and for France, the Market Risk Premium is 6. 18%. For the risk free, we Just took it in bloomberg. com, and as we can see the result is 2. 22%: So, to compute the cost of equity, we have the following template, with a Ke of 4. 26%: Ill/ Estimated Growth Rate: To estimate the growth rate of the dividends, we have many different ways, but we hould find one which is better than the other ones, and we will explain here why this particular one.
For ORPEA, we tried first of all the simplest way, with the annual dividend growth. But, as ORPEA Just starts to give dividends to its shareholders, the dividend growth is up to 43. 10% per year. Which does not make any sense at all. After taking some information in the official Register Document of the financial year 33% of the net earnings. In the table above, we can see that the dividend payout ratio never stop to grow up and stay stable between 32% and 33% the last two years. So, or the next years, we forecast that the dividend payout ratio will stabilized at 33% per year.
So, in other terms, it means that the growth rate will be based in the growing of the net earnings. As the geometric average of the growing net income is 14. 93%, we can forecast that for the next 5 years, the net income will grow by 14. 93%, and so do the dividends. Here is the forecast: So, the growth rate used to forecast the dividend will be g = 14. 93% IW Dividend Discount Model: Using the Dividend Discount Model, we can have a strong clue of what will be the stock price at the end of each financial year, for the next 5 years.
On this table, we can see the market price at the end of the financial year 2012 (33. 50?‚¬), and the terminal value expected in 5 years is 45. 93?‚¬, which mean a growth of 37. 1% or an annual growth of 6. 51%. Moreover, to compute the Terminal Value, we used as a growth rate, the expected long term growth of the French GDP because with the time, most of the company are following the same trend. Which is comprehensible, because the French GDP is computed by adding all the net earnings of the companies in France. So, if the GDP is growing up by 1. 0%, in fact, it means hat the average of growth of the net earnings of the companies in the French territory will increase by 1. 60%. Then, the next step is to compute the predicted value, taking in count the risk of the company (Ke). Here we can see that the intrinsic price of a share is 41. 34?‚¬, which is higher than the market price. In other term, ORPEA is under evaluated. Moreover, we can compute the Enterprise Value of today which ?‚¬2190. 73 min. Sensitivity Analysis: With the sensitivity analysis, we can have an idea of what the price will be, of the rate of growth, or the cost of equity change.
Here, we have in bold the actual data that we compute before, and the other price that we could get if the rate of growth of the terminal value, and the cost of equity are losing or gaining +1- 0. 4%. This table is showing us the potential of one share, in a positive and a negative way. In the worst case, the price of the share could fall to 26. 19?‚¬, and in the best case, it The relative valuation will help us to have a range of the equity and the enterprise value, using multiples and data from the closest competitors of ORPEA: Korian, G?©n?©ral de Sant?©, and Mediclin. About the multiples, we used the following one:
And we deduce from them the average and the median of each multiples to have the next table: And then, we compute them with their respective multiples to have the range: In the final result, we can see that in the equity value, the minimum border of the range is zero. Indeed, ORPEA has a huge net debt of ?‚¬1,931. 59 mln: And it is because if this huge debt that the equity value of the company could be zero. But, from the enterprise point of view, the company is doing well. It as an enterprise value of is ?‚¬2,190. 73 mln which is in the enterprise range founded. VI/ Recommendation: BUY