BACKGROUNDER: Orion Health mulls pre-Xmas float, but what's it worth?

Friday 3rd October 2014

Investor demand is expected to be strong locally and offshore, should health sector software company Orion Health proceed with its long-anticipated initial public offering before Christmas. It's expected to be one of the larger and classier floats this year.

Its prospectus has been designed, a top shelf chairman has been installed in the form of Fonterra boss Andrew Ferrier, and one of the busiest PR firms in the IPO area, Senescall Akers, is representing Orion.

It has talked about a float on the NZ stock exchange for the past two years and the window for doing so this year is within the next few weeks.

But if it does, what is the company worth?

Orion Health was founded in 1993 by Ian McCrae who remains the majority shareholder and chief executive. Its cloud-based products and solutions are used by clinicians in more than 30 counties for patient data exchange and to improve co-ordination of their care.

Revenue has grown to $153 million in the year ending March 2014 and though it has been profitable in the past, it’s not currently while it reinvests most of its healthy cashflow back into expansion globally.

Most of that has gone into new hires with total staff numbers now at 1,100 worldwide. It has achieved high growth rates ranging between 25 percent and 30 percent for many years and has a revised target of hitting $1 billion revenue by 2020.

Valuing high growth companies is a bit more of a dark art than a science. The traditional methods of analysing them, such as earnings multiples, are viewed as less important than customer acquisition and long-term growth potential.

It’s understood First NZ Capital and Deutsche Craigs have been appointed as co-managers for Orion Health’s IPO offer. Standard practise is to do a roadshow around institutional investors assessing demand and what they’d be prepared to pay within a specified range before setting the final retail offer price.

The National Business Review reports an educational trip that stopped short of a formal roadshow where numbers they'd be prepared to pay has been under way in Asia and the US, with bankers and analysts making site visits to see the Orion technology in action. NBR also reported the market valuation of the company could be around $800 million.

One of the influential market players is boutique investment firm Milford Asset Management whose Milford Active Growth Fund already holds a 2.4 per cent stake in Orion. Milford director Brian Gaynor said Orion was likely to go into the NZ50 Index, which would bring it more fund manager attention, although that would depend on trading volumes once listed.

Gaynor said investors will have to make a judgement call on whether the company was likely to be successful or not on capturing the huge global opportunity in e-health, with the quality of the board and management team important factors.

Another key thing investors will look for is the size of the prize – what is the potential market for Orion Health to conquer? Even Orion said it was hard to put a number on it, though the estimated 30 percent to 40 percent waste in all health systems provided enormous scope for governments and health providers to reduce costs through using smart software.

Orion is one of the companies riding the so-called Obamacare boom, which has poured billions of federal government dollars into the health sector. Orion was named as one of 10 major players in the global patient engagement solutions market by US market research firm ReportsnReports.com last month.

It estimated the market would grow from US$5.5 billion to US$13.7 billion by 2019, a 20 per cent compound annual growth rate. Cloud-based solutions were said to be the fastest-growing area as consumers clamour for better healthcare.

Devon Funds Management analyst Matt Goodson said it’s hard to tell what the software company might be worth even though it has lot of potential future growth. “There is a degree of uncertainty around that. But is a real New Zealand success story and its float eagerly anticipated. We’ll have to see what the numbers look like.”

Grant Williamson from Hamilton, Hindin, Greene had a similar view. “It is a lot more mature than the other smaller IT companies that have listed in the past 12 months so that’s a bit different for investors to get their heads around. This is a company with a great reputation and a history of growth and will be sought after.”

There are no other listed health software companies for comparison with Orion Health, with analysts suggesting cloud accounting software company Xero as the most similar.

Like Orion, Xero is also a high growth company chasing customers and market share rather than profits, particularly in the US market. It has had a rollercoaster ride on the sharemarket this year with its market capitalisation hitting over the $5 billion mark in March, briefly valuing it as New Zealand’s biggest company even though revenue at the end of March was just $70 million and it will be loss-making for some time.

Since then, Xero’s market cap has dropped back to $2.73 billion or around $21.30 a share on Oct 3. Orion Health has more than double Xero’s revenue, has been profitable in the past, and unlike Xero, faces no dominant market player in its space to knock over.

One of the other key considerations for Orion’s board before pushing the go button on an IPO is the state of the market.

There has been a flurry of NZX and ASX listings in 2013 and 2014 and more are in the pipeline as companies take advantage of the strong conditions to get public funds for growth.

While the New Zealand market is up 10 per cent this year, Craigs Private Wealth head of research Mark Lister said investors have become a little more cautious. “There have been so many companies coming to market that people at this point can look for high quality opportunities. There is more focus on that now than there was when the first IPO’s started coming to market in the last couple of years.”

JB Were NZ equities manager Rickey Ward agreed investors were more wary about what price they would pay in an IPO than earlier in the year and had become more selective. “These high growth companies are the harder ones to value. There’s a little bit of the ‘trust me’ involved.”

There have been a couple of potential floats pulled – Hirepool and Wherescape – where price expectations are thought to have been above the market.

And a few of the companies floated this year are also still trading below their listing prices, including Gentrack, Ike GPS, Serko and Scales. That could make it harder for following companies to convince investors to participate in a float rather than waiting for the share price to sag post-float.

But there is a huge amount of money sitting on bank deposits with relatively low returns that people are still looking to invest and demand remains for “quality high growth companies that are globally expanding with good management and good products”, Lister said.

BusinessDesk.co.nz

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