Extendicare Inc. (TSX: EXE) is a long-term care facilities company. The business has five segments, including Long-term care; Retirement living; Home health care; Other Canadian operations and corporate segment. 

Why should Investor’s Book Profit?

• Weak profitability margins: The company reported lower gross margin and EBITDA margin of 10.2% and 6.2%, respectively, in Q3FY21, as compared to the industry median of 35.3% and 14.7%. Moreover, net margin stood relatively lower at 0.8%, as compared to the industry median of 4.9%. The above indicates poor cost management and weak operational efficiencies.
• Higher Balance Sheet risk: Investors in EXE might witness higher balance sheet risk, as Debt/Equity ratio of the company stood at 4.7x in Q3FY21, which was significantly higher than the industry median of 0.61x. Moreover, the company reported its net debt to EBITDA of 21.51x in Q3FY21, as compared to the industry median of 5.47x. A higher ratio suggests poor debt protection ability of the firm, which remains as a major reason for concern.
• Relatively lower net earnings: The company is combating with its input costs which has dampened the company’s profitability in the recent past. Notably, EXE reported its net earnings of CAD 2.401 million and CAD 11.684 million, respectively for Q3FY21 and 9MFY21, respectively, versus CAD 34.644 million and CAD 26.992 million, in pcp. The above was on the backdrop of higher y-o-y revenue of 4.5% and 10.51%, respectively in Q3FY21 and 9MFY21, respectively.

Valuation Methodology (Illustrative): Price to Earnings

Analysis by Kalkine Group

Stock Recommendation:

On account of the rising cases of COVID -19 viruses across the North America, we have seen a dip in the occupancy level across the retirement residences, and resurgence of the viruses might affect the occupancy level and the cash flows of the company.

We have valued the stock using Price to Earnings-based relative valuation approach and arrived at a target price offering double-digit downside potential (in % terms). We have considered peers Choice Properties Real Estate Investment Trust, Allied Properties Real Estate Investment Trust etc. Hence considering the aforesaid facts, we recommend a ‘Sell’ rating on the stock of EXE at the current market price of CAD 7.31 at 9:40 am Toronto time on January 07, 2022.

One-Year Technical Price Chart (as on January 07, 2022). Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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