Eureka Holdings - a play on aging populations

Recent weakness across both domestic and international equity markets provides a timely reminder to investors of the importance of understanding the businesses that you invest into.

The best businesses often have strong management teams, a good industry structure and ideally strong underlying thematic trends driving product or service sales. This in part explains the recent resurgence of the aged care market. After a tough period during the GFC the sector is back in favour, as demonstrated by the strong investor interest in recent IPO's including Regis Healthcare (REG) and Japara Healthcare (JHC) as well as improvement in the fortunes of retirement village’s operator Aveo (AOG). 

Most of these businesses focus on provide living solutions for the aging population; however, their products are often designed for retirees with a certain level of wealth. Given many of the current round of retirees did not have the benefit of superannuation in their full working lives, there should be a large market in providing affordable living options to retirees. We have recently identified a micro-cap company which does just that called Eureka Holdings (ASX: EGH). 

A few things have attracted us to this business. Firstly, it has a long history of managing low cost, regional retirement villages on behalf of the owners with about 1400 units currently under management. The interesting thing is that only ~200 of the units (and land) are actually owned by EGH.

There is more money to be made from owning the units rather than just managing them on behalf of someone else. This was identified by EGH's new management team, who upon recognising the potential in this little company bought a large shareholding, recapitalised the business and installed themselves to run the business bringing a new strategy. The new plan is to use the insight gained from managing the 1400 centres to selectively buy out the owners and take control and ownership of entire centres. 

Early progress is evidenced by the turnaround in earnings in FY14 where EBITDA moved up materially to ~$1.5 million. Following the acquisition of several centres, management are guiding for FY15 EBITDA to be at least $2 million higher than FY14, This implies circa $3.5 million EBITDA in FY15.  This suggests that the business is currently trading on 8.5 times FY15 EV/EBITDA which is probably fair if management deliver on their forecasts.

However, the bigger question is whether 8.5 times is a lot to pay for a business with such a large growth opportunity ahead of it in an industry which seems to be also growing.  Time will tell whether management can execute on its acquisition strategy and grow value for all shareholders including themselves as the largest holders of stock.

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