Sagicor & NCB Cap Markets team up to bring medical IPO

Sunday, January 21, 2018

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Elite Diagnostics, the latest initial public offer to be structured for the Jamaica Stock Exchange, has been rated a BUY by JN Fund Managers. This IPO is the second medical-related stock offer in recent weeks, with GWest coming to market courtesy of JMMB. That IPO was oversubscribed and closed within minutes of its opening date in December.

That said, in regard to Elite Diagnostics, the joint venture of two brokerage houses is not normally seen in the Jamaican market and could augur well for the maturity of the investment community.

Not only is NCB Capital Markets (NCBCM) the co-lead broker with Sagicor Investments, but Steven Gooden, CEO of NCBCM is also chairman of the board of Elite Diagnostics. Other notable board members include Kevin Donaldson of Sagicor Investments, attorney at law Paula Kerr-Jarrett, Peter D Chin of Alliance Investments, and Wisynco head, William Mahfood.

Investment broker, JN Fund Managers (JNFM) notes that the fair value of the stock is actually $2.88, which implies that at the IPO price of $2.00, investors stand to make a short-term gain of 43.79 per cent upside from the intended IPO price.

Further analysis by the JNFM team reveal that:


• Tax benefit – The company stands to benefit from a 10-year concessionary tax regime that starts from the date of listing. For the first the Elite enjoys 100 per cent tax relief and for the remaining five years, benefit from 50 per cent tax concession.

• Strong historical revenue growth – Between fiscal year 2014 and fiscal year 2017, the company has exhibited substantial growth in sales, having a compound annual growth (CAGR) rate of 65.22 per cent.

• Non-cyclical industry – Elite operates in a non-cyclical industry. Therefore, the risk of earnings volatility is lower as the company's performance is not likely to fluctuate with the performance of broader local/global economy. There is also limited competition currently with only four other major private diagnostic imaging centres in Jamaica.

• Strategic investors – Elite is controlled by a group of private partners through a vehicle called Excel Investments Inc with equity participation from NCB Capital Markets Limited (29.61% ownership) and Sagicor Investments Jamaica Limited (9.87 per cent ownership). Elite has already benefited and poised to benefit from its association with these key strategic investors who provide business management expertise and financial backing.

• Robust Liquidity Position – Elite has a solid liquidity position as a result of its low reliance on short-term financing and substantial decline in current liabilities. The company's liquidity as measured by its current ratio was 22.66 times earnings as at first quarter 2018, relative to the 23.75X as at fiscal year 2017.


• Small free float – Of the approximately 353.40 million shares of the company, only approximately 70.7 million, (20 per cent of total shares offered) will be issued with a further 52.68 million shares being made available to the general public. The scarcity of shares could inhibit trading activity which could curtail potential upside.

• Reliance on independent services – The company utilises the services of an independent radiologist (Dr Kevin Palmer) and West Indies Radiology Outsourcing Ltd (“WIROL”) to provide radiology services. If WIROL were to terminate the provision of its services unexpectedly the company's operations would be significantly disrupted which could result in a reduction of income.

• Foreign currency exposure – Elite's Diagnostic equipment is purchased abroad with foreign currency – typically United States dollars. The depreciation of the Jamaican dollar relative to the US$ would increase the company's payment obligations to its supplier.

• Lack of comparable – At present, there is not a like-for-like comparable listed on the Jamaica Stock Exchange, which makes it difficult for investors to benchmark the performance of the company and to fully assess the potential of the industry.

• Dependence on referrals – As is customary in the industry, Elite relies on the referral of patients from unaffiliated medical practitioners and hospitals that are not obligated or contracted to refer patients to the company. Therefore, the company may be affected should doctors reduce the number of patients they refer to Elite.

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