Extendicare Inc.

Extendicare Inc (TSX: EXE) is a leading provider of care and services for seniors across Canada and operates across 122 long-term care homes and retirement communities and offered ~9.2 million hours of home health care services on a yearly basis. The group operates under the Extendicare, Esprit Lifestyle, ParaMed, Extendicare Assist, and SGP Purchasing Partner Network brands.

The Board of Directors announced a monthly cash dividend of CAD 0.04 per common share, which is payable on October 15, 2020.

Q2FY20 Financial Highlights: Extendicare declared its quarterly results, wherein the company reported stable revenue, but it failed to retain the momentum in its bottom-line. The company posted total revenue of CAD 281.947 million, marginally down from CAD 284.053 million recorded in the previous corresponding period (pcp). Excluding the year-over-year decline in revenue from the ParaMed B.C. operations (CAD 12.6 million) and the incremental funding related to Bill 148 recorded (CAD 2.2 million) in Q2 2019, revenue increased by CAD 12.7 million or 4.7% to CAD 281.9 million in Q2 2020 from CAD 269.2 million in the same prior-year period. The growth was driven improved number from Long-term care segment and a mildly higher income from retirement living, meanwhile, a lower income from home health care remained as a drag. NOI stood at CAD 19.934 million, down from CAD 35.320 million in the Q2FY19, while NOI margin took a hit and fell to 7.1%, from 12.4% in Q2FY19, primarily due to as a result of increased costs associated with COVID-19 and pandemic pay programs. The company posted Adjusted EBITDA of CAD 8.167 million, declined from CAD 25.152 million, majorly due to an elevated cost related to COVID 19, lower NOI from home health care and higher administrative expenses. The company reported a net loss of CAD 3.659 million, versus a net profit of CAD 8.325 million a year ago. The company posted an average occupancy of long-term care at 93.5%, down 400 bps from Q2FY19 and 350 bps dip from the previous quarter, on account of COVID-19. 

Q2FY20 Income Statement Highlights (Source: Company Reports)

Risks: On account of COVID 19 pandemic, the group witnessed a lower admission in the recent past which has taken a toll on the average occupancy rate. Continuation of such a trend might affect financial performance.

Valuation Methodology: EV to EBITDA Based Relative Valuation (Illustrative)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of EXE tumbled ~31%, so far this year due to a weak investor's sentiment on account of COVID 19 pandemic. In the recent past, the company witnessed a steady improvement in ParaMed's business volumes, coupled with a higher ADV for the four weeks ending August 9, 2020 to 22,422, increased 10.0% from Q2FY20, which is encouraging. Restrictions in Ontario have been lifted with the retirement living segments, and EXE resumed in-person tours for prospective residents, which is a key positive. Furthermore, on a long-term perspective, the company's business model is solid and is dependent on the aged population of the country, which is a key positive. Extendicare maintained its strong financial flexibility and liquidity in Q2 2020, with cash and cash equivalents on hand of CAD 122.0 million and access to a further CAD 71.9 million in undrawn demand credit facilities as at June 30, 2020. In addition, the company has CAD 14.1 million of restricted cash held by its captive insurance company that is anticipated to be released in Q3 2020. The group continued to pay dividend amid challenging time, which is encouraging from an income investor point of view. At the last traded price, the stock was offering a dividend yield of ~8.3%, which is lucrative considering the current interest rate scenario. We have valued the stock using the EV to EBITDA multiple based illustrative relative valuation method and have arrived at a target upside of lower double-digit (In percentage terms). We have taken peers like Sienna Senior Living Inc, Chartwell Retirement Residences, etc., for the comparison purpose. Though the business model is resilient, and prospect looks attractive, the company has a higher debt component in its balance sheet, which might pose a challenge. The group's long-term debt to capital ratio stood at 65.7%, which is higher than the industry median of 27%. Considering the current trading levels, and aforesaid facts, we recommend a 'Speculative Buy' rating on the stock at the closing market price of CAD 5.80 on 17 September 2020

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

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