Company Overview: Estia Health Limited (ASX: EHE) is involved in providing high-quality residential aged care services across Australia. It provides care services to over 8,000 residents across ~69 homes in Victoria, South Australia, NSW, and Queensland. The company offers services, including personal assistance, therapies, meals, & lifestyle activities. It also provides clinical care that comprises frequent assessments and includes pain management programs, daily medication, medical services, expert dementia care, along with personal care.

EHE Details

Geographical Expansion & Higher Investments Aid EHE: Estia Health Limited (ASX: EHE) is a residential aged care operator. The company’s market capitalisation as on 13 January 2021 stood at ~$436.36 million. For the year ended 30 June 2020, the company reported total operating revenue of $636.9 million, up around 8.7% year over year. EBITDA for the year stood at $126.6 million, up by 34.7% year over year. In FY20, net loss after tax came in at $116.9 million, owing to the ongoing uncertainty regarding sector funding and reform, due to the COVID-19 pandemic. The company declared a fully franked interim dividend of 5.4 cps, which was paid on 27 March 2020. During the period, operational revenue (excluding the impact of AASB 16) stood at ~$593.5 million, increasing 1.3% year over year. Revenues from the Government-funded residential care subsidies & supplements came in at $443.3 million, whereas revenues from Resident daily care fees and other resident fees came in at $107.1 million and $43.1 million, respectively. Notably, average occupancy rate stood at 93.2% in FY20. Operational beds in FY20 increased to 6,102, from 6,046 in FY19.

The company has successfully constructed new purpose-built homes to meet local community demand. This has been exhibited well by the robust performance of its new home in Southport, Queensland. In May 2019, the new homes opened by the company saw a 100% occupancy rate by February 2020. Notably, the company’s new 126 resident home at Maroochydore, Queensland commenced in August 2019 and has also operated solidly achieving 81.7% occupancy within its first 12 months. These homes together provided a net positive EBITDA contribution of $0.5 million in FY20.

Looking at the past performance, EHE witnessed a compound annual growth rate of 7.9% in total operating revenue in the time span of FY18-FY20. The company has been investing in new technology and service enhancement. Further, the company’s focus on enhancing clinical governance, quality management and resident care systems by construction of new homes and refurbishment of existing properties to expand bed capacity, will drive future earnings. The company has also witnessed a CAGR growth of 18.5% in EBITDA over a time span of FY18-FY20.

Growth in Revenue & EBITDA (Source: Company Reports)

Key Focus Area: The company has completed 10,429 Professional Development Programs (PDP) in FY20 and further focuses on the critical areas of education in infection surveillance, prevention, and control. EHE continues to improve its strategy and focus pertaining to occupancy, which would become more crucial in an environment of increased competition and heightened customer expectations. The company remains on track for new quality standards, with increased investment in resident amenity and improvements in quality and safety systems. Further, the company focuses on expanding its portfolio and continues to take necessary measures to improve the quality of its existing homes. In doing so, the company has been carrying out the acquisition of new homes since FY18 and is continuously looking for single and multiple home acquisition opportunities to expand its portfolio and improve the financial performance in the coming years.

Geographical Diversification Remains a Key Catalyst: As at 30 June 2020, total number of operational homes in Queensland stood at 8 homes in 851 operational places. With respective to North South Wales, total number of operational homes was 17 homes in 1,890 operational places. Further, total number of operational homes in South Australia was 17 homes in 1,348 operational places. Victoria had around 27 homes in 2,093 operational places. Total number of operational homes as at 30 June 2020 came in 69 homes with 6,182 total operational places.

Total Operational Places in FY20 (Source: Company Reports) 

1QFY21 Trading Update: During the quarter, occupancy outside of Victoria demonstrated 93.7%. Average occupancy in Victoria stood at 86.8% and spot occupancy came in at 83.2% as on 31 October 2020. Total Group occupancy averaged at 91.3% in 1QFY21. The company reported total revenues in 1QFY21 of $158.9 million. As at 31 October 2020, balance of outstanding RADs and Bonds came in at $840.6 million, up $4.3 million since 30 June 2020, owing to COVID-19 led outbreak. Net debt as at 31 October stood at $114.5 million with existing liquidity headroom of $211.2 million under the company’s syndicated loan facility.

Balance Sheet & Cash Flow Position: At the end of FY20, the company reported cash and cash equivalents of $30.6 million.  For the year, the company had a net bank debt of $99.4 million with $197.15 million in undrawn debt facilities. As at 30^th June 2020, the company had total bank facilities of $330 million with a maturity date in November 2022. The gearing ratio was 1.3x EBITDA. An amount of $80.6 million was utilised as capital investment to expand and enhance the company’s home portfolio. Net RAD inflows came in at $26.5 million in the year, with a RAD balance of $831.5 million, recorded as at 30 June 2020. Operating cash inflow in FY20 came in at $126.06 million as compared to $87.9 million in FY19.

Balance sheet, net bank debt and cash flow (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 48.9% of the total shareholding. Perpetual Investment Management Limited is the entity holding maximum shares in the company at 14.7%. Network Investments Holdings Pty. Ltd. is the second-largest shareholder, with a holding of 10.43%.

Top Ten Shareholders (Source: Thomson Reuters)

Key Metrics:  In FY20, the company had a gross margin and EBITDA margin of 91.9% and 19.9%, which were higher than the industry median of 51.3% and 16.3%, respectively, representing decent financials. The company’s debt-to-equity multiple in FY20 stood at of 0.33x, slightly higher than the industry median of 0.32x. The cash cycle of the company stood at -75.1 days, which is better than the industry median of 14.1 days.

Key Metrics (Source: Thomson Reuters) 

Key Risk: Although, EHE’s long-term business fundamentals look promising, the ongoing economic doldrums in the wake of the global coronavirus outbreak exposes the company to shorter-term disruptions. Further, the doubts regarding the duration and impact of the coronavirus pandemic on the company’s overall business has constrained EHE to quantify any degree of future certainty regarding the impact on revenues, costs, or funding support from the Government. The Group has also incurred incremental employee costs due to the impact of COVID-19. Higher costs may dampen margins, going forward. EHE’s leveraged balance sheet also poses risks with total debt of $201.8 million and cash balance of only $30.6 million as of June 30, 2020. This indicates that the company needs to be more focused on the cash flow generation front. Furthermore, high debt may limit growth and any further increase in borrowings might worsen its risk profile.

Outlook: The company has invested $80.6 million in FY20, resulting in increased bed capacity, while continuing the organisation’s refurbishment program focused on enhancing the resident experience. The company thus seems well-positioned to benefit in the long run. Further, the ageing of the Australian population and in particular the ageing of the “baby boomers” is expected to see a market increase. Thus, the Australians are likely to need more aged care in the coming year. This bodes well for EHE. The company also expects new 105 bed home at Blakehurst (NSW) to be operational in February 2021. Going forward, the company’s higher investment in clinical governance, quality management and resident care systems amid the pandemic, is expected to aid its top-line growth. Further, Estia Health Limited would be carrying out activities which would support it in the refurbishment as well as execution of expansion plans for the existing homes.  The company’s balanced approach with respect to growth, coupled with the expansion of its existing portfolio is likely to aid EHE’s business with higher growth, going forward.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: P/CF Multiple Based Relative Valuation (Illustrative)

P/CF Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months

Stock Recommendation: The stock of EHE is current trading below the average of its 52-week’s low and high level of $0.905 and $2.620, respectively. The stock went up ~15.57% in the last three-months period. On a technical analysis front, the stock has a support level of ~$1.262 and a resistance level of ~$1.977. From the analysis standpoint, the company has recorded revenue CAGR of 7.9% over the last two years. We have valued the stock using the P/CF multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). For the purpose, we have taken the peer group like Regis Healthcare Ltd (ASX: REG), Japara Healthcare Ltd (ASX: JHC), Oceania Healthcare Ltd (ASX: OCA), and Summerset Group Holdings Ltd (ASX: SNZ). Considering the current trading level, decent returns in the past three months period, decent long-term outlook, valuation, and geographical expansion, we recommend a “Buy” rating on the stock at the closing price of $1.675, up by 0.299% on 13 January 2021. 

EHE Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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