Both Japara and Estia have announced the write-down of their ‘goodwill’ in recent weeks – by up to $300 million and $150 million respectively – but this hasn’t reduced the value of their businesses. We asked StewartBrown Senior Partner Grant Corderoy to explain why ‘goodwill’ doesn’t equal ‘value’ in the eyes of the market.
Grant (pictured) tells us that the For Profits ‘purchase’ their goodwill when they acquire another home. For example, if they buy a home for $10 million and the land and buildings are valued at $8 million, they accrue $2 million in goodwill – some in the value of the bed licenses and the other part in the value of the good will.
Both are intangible assets – so they do not affect the value of the company.
But what happens when those homes are no longer supporting sufficient returns to support the value of their goodwill?
Grant says Estia and Japara have clearly taken the view that the purchased goodwill on their balance sheets isn’t worth what it has stated, given the current financial performance of the sector due to COVID so they have elected to write down its value.
This then goes through as an expense, reducing the value of its assets.
Grant says that those watching the performance of listed providers should look closer at their market capitalisation instead.
Under normal circumstances, the market capitalisation should be higher than the net assets.
Take Japara as an example – its market capitalisation is currently $130.95 million.
This is based on the current share price (0.0495 as of Monday 20 July) multiplied by the number of shares – 267.25 million.
But the operator had net assets of $527.949 million as of 31 December 2019.
That’s around a $397 million difference – which suggests the market is vastly undervaluing Japara.
It would seem then, based on this analysis, that Japara in particular would represent a ‘good buy’ – with the market valuing it well below the real value of its assets and business.
But with the current financial pressures on the sector – and the Royal Commission now not due to report until 26 February 2021, over seven months away – will we see any action in this space?
