Company Overview: Estia Health Limited (ASX: EHE) provides high-quality residential aged care services across Australia. It provides care services across ~69 homes in Victoria, South Australia, New South Wales, 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, and personal care.

EHE Details

EHE Rides on Turnaround Strategies & Geographical Expansion: Despite the challenging scenario led by the COVID-19 outbreak, the company delivered a resilient performance in FY21, supported by provisional Government funding and grants. The company’s homes have remained fully certified, with 82.4% of EHE’s residents and 82.1% of employees being partially or fully vaccinated against COVID-19, as on 20 August 2021.

Sneak Peek at FY21 Results (Period Ending 30 June 2021):

• Rise in Operating Revenues: The company has generated operating revenue of $612.05 million in FY21, an increase of 5.5% over FY20. In FY21, the company received $21.4 million of temporary funding and grants.
• Recovery in EBITDA: The company witnessed recovery in the 2nd half, which produced twice the EBITDA level of 1HFY21. In 2HFY21, the company returned to a profit recording EBITDA of $7.2 million from 27 Victorian Homes.
• A Turnaround in Profits: In FY21, profit after tax came in at $5.99 million against a loss of $116.9 million. During the period, EHE finalised the sale of three surplus land sites within Victoria and New South Wales, which resulted in a profit before tax of $9.5 million.
• Enhancing Shareholder’s Value: The company has a decent track record of rewarding shareholders through dividends. EHE declared a fully franked final dividend of 2.3 cps, representing 100% of NPAT.
• Government Fundings: Revenues from the Government-funded residential care subsidies & supplements came in at $456.12 million, whereas revenues from Resident daily care fees and other resident fees came in at $106.56 million and $43.1 million, respectively.
• Average Occupancy: Average occupancy rate stood at 91.2% in FY21. Operational beds in FY21 increased to 6,298, up from 6,182 in FY20. The company’s new 126 resident home at Maroochydore, Queensland, commenced in August 2019 and operated steadily, achieving 91.5% average occupancy in FY21.
• Geographical Diversification: As at 30 June 2021, the total number of operational homes in Queensland stood at eight homes in 851 operational places. With respect to North South Wales, the total number of operational homes was 18 homes in 1,975 operational places. Further, the total number of operational homes in South Australia was 17 homes in 1,351 operational places. Victoria had around 26 homes in 2,047 operational places.

Revenue Trend; Analysis by Kalkine Group

Balance Sheet & Cash Flow Position: 

• Increase in Cash Balance: At the end of FY21, the company reported cash and cash equivalents of $33.43 million, up from $30.6 million reported at the end of FY20.
• Reduction in Net Bank Debt: The company had net bank debt of $81.1 million (with $210.9 million in undrawn debt facilities) as at 30 June 2021, down from $99.4 million net bank debt as on 31 July 2020.
• Bank Facility: As at 30^th June 2021, the company had total bank facility of $330 million with a maturity date on 15 November 2022. The gearing ratio was 1.3x EBITDA.
• Capital Investments: An amount of $49 million was utilised as capital investment to expand and enhance the company’s home portfolio.
• RAD Inflows: Net RAD inflows came in at $30.6 million in the year, with a RAD balance of $863.9 million, recorded as at 30 June 2021.

Key Metrics: In FY21, gross margin of the company stood at 90%, higher than the industry median figure of 42.9%.  Debt-to-equity ratio in FY21 came in at 0.29x, lower than the year ago figure of 0.33x.

Profitability & Liquidity Profile; Analysis by Kalkine Group  

Key Update: Recently, the company informed the market that one of its Directors, Karen Penrose, had an indirect interest in the company, acquired 4,500 fully paid ordinary shares via on-market trade at a price of $2.365 per share.

Top 10 Shareholders: The top 10 shareholders together form around 44.59% of the total shareholdings, while the top 4 constitutes the maximum holding. Perpetual Investment Management Limited is the entity holding maximum shares in the company at 11.28%. Network Investments Holdings Pty. Ltd. is the second-largest shareholder, with a holding of 10.42%, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group  

Key Risks:  

• The company is exposed to the risk of uncertainties associated with COVID-19 that might constrain EHE to quantify any degree of future certainty regarding the impact on revenues, costs, or funding support from the Government.
• EHE’s leveraged balance sheet 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.
• It operates in a highly competitive market and is prone to the risk of losing existing and new market share.
• Any adverse movement in foreign exchange price may impact the financial performance of the company.

Outlook: EHE continues to improve its strategy and focus pertaining to occupancy. Further, the company’s focus on enhancing clinical governance, quality management, and resident care systems by constructing new homes and refurbishing existing properties to expand bed capacity is expected to drive future earnings. The company remains on track for new quality standards, with increased investment in resident amenities and quality and safety systems improvements. EHE is continuously looking for single and multiple home acquisition opportunities to expand its portfolio and improve its financial performance in the coming years.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative) 

Source: Analysis by Kalkine Group 

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: The stock of the company has been corrected by ~28.29% in the past nine months. Currently, the stock has a 52-week high and low level of $2.75 and $1.275, respectively. The stock has been valued using an EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight discount compared to its peer average, considering high debt, incremental employee costs due to the impact of COVID-19, adverse forex risk, etc. For the purpose of valuation, peers such as Regis Healthcare Ltd (ASX: REG), Japara Healthcare Ltd (ASX: JHC), and others have been considered. Considering the aforesaid fact, rise in top line, government fundings, geographical expansion, decent long-term outlook, current trading levels, valuation, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $2.27, down ~2.16% as on 22 September 2021, 10:30 AM (GMT+10), Sydney, Eastern, Australia.

EHE Daily Technical Chart, Data Source: REFINITIV 

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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