Sienna Senior Living Inc.

Sienna Senior Living Inc. (TSX: SIA), is a Canada-based seniors' living providers. The Company serves the independent living (IL), independent supportive living (ISL), assisted living (AL), memory care (MC) and long-term care (LTC) through the ownership and operation of seniors' living residences in the Provinces of British Columbia and Ontario.  

Key highlights 

• Event update: The company will be reporting its 2020 fourth quarter results after market close on Thursday, February 18, 2021. 

• An income play: Despite this challenging environment, the company maintained its dividend payment while on the other hand, most of the businesses are cutting down or suspending their dividend distribution. This shows the group's financial strength and suggests that the group is a friend of income investors. The group recently announced a dividend of CAD 0.078 per common for January 2021, representing CAD 0.936 per Common Share on an annualized basis. Moreover, at the last closing price, the stock was offering a dividend yield of 7.02%, which looks lucrative considering the current interest rate environment.

• Steady rent collection: In December 2020, average same property occupancy level in the retirement portfolio was 79.8%, a decline from the prior months primarily due to renewed access restrictions at many residences amid the second wave of the pandemic. Throughout the pandemic, rent collection levels continued to remain high, at and above 99%.

Source: Company

• Solid Financial Position: The company maintains a strong financial position with significant liquidity and a substantial unencumbered asset pool. In Q3 2020, liquidity increased to CAD 210.2 million, from CAD 144.0 million on December 31, 2019, comprised of cash and cash equivalents and available credit facilities.

Source: Company

• Redemption of Debentures:On October 2, 2020, the Company repaid all outstanding 3.474% Series B senior secured debentures with a maturity date of February 3, 2021, for CAD 246 million. This significantly reduces financing risks. Also, the Company got released its security collateralized, which increased the Company's pool of unencumbered assets by more than CAD 300 million to approximately CAD 840 million.

Financial overview of Q3 2020

Source: Company 

• In Q3 2020, the company posted a muted revenue of CAD 166.8 million, compared to CAD 168 million in the previous corresponding period.
• The company reported an operating loss of CAD 0.29 million, against a profit of CAD 15.4 million in pcp, primarily due to net pandemic expenses, which consisted mainly of additional staffing and PPE costs to manage COVID-19.
• Net loss stood at CAD 6.4 million in Q3 2020, as against a profit of CAD 3.7 million in pcp, primarily due to high operating and administrative expenses. 

Risks associated with investment

The Company is subject to general business risks, including those inherent in the seniors’ living sector. These risks include government regulation and oversight, changes in consumer preferences, fluctuations in occupancy levels and business volumes, competition from other senior’s care providers, etc. These factors may adversely affect the business, operating results or financial condition of the Company. 

Valuation Methodology (Illustrative): EV to EBITDA 

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation  

With healthy rent collection and steady occupancy in the group’s retirement portfolio, the operations are getting benefitted from the re‐opening of their residences for in‐person tours, which is a big positive for the company. We believe that in the upcoming time, the net pandemic expenses, which consisted primarily of additional staffing and PPE costs to manage COVID-19, would come down gradually, which would improve its EBITDA. Further, with a strong financial position, along a healthy dividend yield of more than 7% is a boon for the long-term horizon investors. Based on the rationales discussed above and valuation, we have given a “Speculative Buy” rating at the closing price of CAD 13.33 on February 5, 2021. We have considered Chartwell Retirement Residences, Killam Apartment REIT, Extendicare Inc, etc. as the peer group for the comparison.

Source: Refinitiv (Thomson Reuters)

Extendicare Inc.

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. 

Key Highlights:

• Improved Sequential Performance: The company has reported revival in its operations and posted revenue, gross profit and net income of CAD 296.8 million, CAD 76 million, and CAD 34.5 million, respectively in Q3FY20, as compared to CAD 281.9 million, CAD 19.9 million and a net loss of CAD 3.7 million in Q2FY20. Moreover, adjusted EBITDA stood significantly higher at CAD 63.794 million, as compared to CAD 8.167 million in Q2FY20, while adjusted EBITDA margin stood at 21.5%, considerably higher than 2.9% in Q2FY20.
• Better than Industry median metrics: The group reported higher EBITDA margin, operating margin and net margin of 21.5%, 18.3% and 11.7%, respectively, as compared to the industry median of 13.4%, 9% and 3.5%, respectively. Improved margin suggests higher operational efficiency.
• An Income Play: Historically, the group reported consistent dividend payout across the economic cycles. Notably, EXE paid a total dividend of CAD 30.515 million in 9MFY20, significantly higher than CAD 27.950 million, a year ago. Moreover, at the last closing price, the stock of EXE carries an annualized dividend yield of ~7.7%, which is lucrative considering the current interest rate environment.
• Event Update: The group would disclose it Q4FY20 result on February 25, 2021.

Q3FY20 Financial Highlights:

• EXE announced its quarterly result, wherein the group posted revenue of CAD 296.786 million compared to CAD 282.733 million in the previous corresponding period (pcp). The increase was supported by additional income from funding related to COVID-19 amounting CAD 28.7 million, LTC funding enhancements, expansion of the retirement living operations and growth in other operations, partially offset by a lower home health care volume.
• The group reported higher operational efficiency and posted lower operating expense of CAD 220.810 million, as compared to CAD 247.866 million in pcp. The company reported Adjusted EBITDA of CAD 63.794 million, as compared to CAD 23.846 million in Q3FY19, supported by higher revenue and a lower operating expense.
• Adjusted EBITDA soared to CAD 63.794 million, from CAD 23.846 million in pcp.
• Net earnings stood at CAD 34.466 million, significantly higher from CAD 7.259 million in Q3FY19.
• Cash and cash equivalents stood at CAD 170.061 million, while total assets came at CAD 930.556 million.

Q3FY20 Income Statement Highlights (Source: Company Reports)

Risks: Due to the restriction imposed on account of the spread of COVID 19 viruses, the group might witness a fall in the occupancy rate coupled with higher input costs due to sanitization.

Valuation Methodology (Illustrative): EV to EBITDA based

(Note: All forecasted figures and peers have been taken from Thomson Reuters).

Stock Recommendation:

The stock of EXE is hovering above the long-term support levels of 100-days, 150-days and 200-days simple moving average (SMA), indicating a bullish price trend. The long-term prospect of the industry remains extremely positive driven by growing aged population and increased demand for senior care. Moreover, the group provides essential, diversified and high-quality senior care services, in different markets across Canada and generates ~90% of the revenue from government contracts, which is a key positive. We have valued the stock using EV to EBITDA based relative valuation approach and arrived at a target price offering double-digit upside potential (in % terms). We have considered industry (Healthcare Providers & Services) median on NTM basis. Hence considering the aforesaid facts, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of CAD 6.22 on February 5, 2021.

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

Disclaimer

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