Extendicare Inc.

Extendicare Inc (TSX: EXE) is a leading provider of care and services for seniors across Canada. The group operates under the Extendicare, Esprit Lifestyle, ParaMed, Extendicare Assist, and SGP Purchasing Partner Network brands. The Company provides contract services across a network of 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 provide purchasing services to third parties representing approximately 72,900 senior residents across Canada.

The Company is expected to report its second quarter FY20 financial results on August 14, 2020. The Company declared a monthly dividend of CAD 0.04 per share, payable on August 17, 2020.

Q2FY20 Key Update:

• For the Q2FY20, the Group reported average occupancy at ~93.5%, down from ~97% in Q1FY20. Currently, out of the 69 long-term care homes and retirement communities, only three long-term care homes reported outbreak, with only one or two active cases of COVID-19 in each home.
• The Company reported ~CAD 21.4 million of expenses related to pandemic during the first half of FY20. The Company received grants of CAD 10.4 million from various government programs.
• The Company reported a cash balance of CAD 122.0 million, and the Company has undrawn demand credit facilities amounting CAD 71.9 million.

Q1FY20 Financial Highlights: For the first quarter FY20, the Company posted Revenue of CAD 268.8 million, up 2.3%  on y-o-y basis, driven by long-term care (LTC) funding enhancements, COVID-19 funding, growth in retirement living and the impact of the leap day, partially offset by lower home health care volumes. The Company reported adjusted EBITDA of CAD 19.9 million, grew by CAD 0.3 million, aided by lower ParaMed transformation costs, partially offset by higher administrative costs. The Company reported net operating income of CAD 30.351 million, stood stable as compared to CAD 30.655 million in the previous corresponding period.

Q1FY20 Income Statement Highlights (Source: Company Reports)

Risks: The Company provides long-term care homes and retirement communities services to the aged people across Canada, and due to the outbreak of COVID 19, the risk of spreading virus within the long-term care homes has increased. The company witnessed a few active cases within the facilities, and a further increase in the cases might affect the occupancy rate.

Stock Recommendation: The stock of EXE corrected ~35% so far this year due to a fear of COVID outbreak within the Community. To combat the current pandemic and ensure safety measures, the company took a prudent step and secured PPE inventory amounting to CAD 12.7 million to ensure sufficient supply to provide the necessary level of protection to the residents, clients and staff in the foreseeable future. We believe the company has a resilient business model which is correlated with the population of the nation. EXE believes that with evolving market conditions and reduced severity of the pandemic, the demographic tailwinds, and the investments of the company in businesses will offer a variety of opportunities for the future. Further, the stock is offering a dividend yield of 8.7%, which is lucrative considering the current interest rate environment. However, yield seems to be a little inflated, given the recent price correction. On the valuation front, the stock is trading at a discount compared to the industry (healthcare providers and services). The stock is available at a forward EV/Sales multiple of 0.9x against the industry average of 2.4x. 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 68.5%, which is higher than the industry average of 30%. Hence, considering the above facts, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of CAD 5.52 on July 27, 2020.

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

Sienna Senior Living Inc.

Sienna Senior Living Inc. (TSX: SIA) offers a full range of seniors' living options, which includes assisted living, long-term care, independent living, and specialized programs and services. The firm operates solely within Canada. The company’s operating segments include LTC Business, Retirement and Other. The group derives the majority of revenue from LTC segment, which consists of 35 LTC residences in the Province of Ontario, eight seniors' living residences located in the Province of British Columbia.

The company would disclose its second quarter FY20 results on August 13, 2020. The company announced a monthly dividend of CAD 0.078 per common share, payable on August 14, 2020.

Q1FY20 Financial Highlights: SIA announced its quarterly results and reported revenue of CAD 166.43 million as compared to CAD 163.66 million in the previous corresponding period (pcp). The marginal growth was due to the inflationary increases in flow-through funding, partially offset by the lower occupancy rate. Income before net finance charges, transaction costs and provision stood at CAD 14.40 million, grew from CAD 12.62 million in Q1FY19, thanks to the improved revenue combined with a significantly lower administrative expense and flat depreciation expense, while higher operating expense remained a drag. The rise in the operating expense was underpinned by higher labor costs and other annual inflationary increases. Net finance charges were significantly higher at CAD 16.78 million versus CAD 11.35 million in pcp primarily due to a fair value loss on interest rate swap contracts. Sienna Senior posted a net loss of CAD 2.49 million against a net profit of CAD 442 million. Adjusted funds from operations (AFFO), during the quarter, stood at CAD 25.58 million against CAD 23.38 million in pcp. The increment was due to the increase in operating funds from operations (OFFO), slightly offset by the timing of maintenance capital expenditures.

Q1FY20 Income Statement highlight (Source: Company Reports)

Risks: The company is subjected to interest rate risk on the mortgage, and interest rate volatility might hinder the company’s earnings. Due to the rise of COVID 19, the company might witness a decline in the occupancy levels.

Valuation Methodology: EV to EBITDA Based (Illustrative)

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

Stock Recommendation: The stock of SIA corrected ~49% so far this year amid volatility in the equity markets on account of COVID-19 pandemic. In the recent past, the company witnessed a decline in occupancy rate; however, fees collection remained stable. Furthermore, operating expenses are likely to increase due to COVID 19, which might suppress the profitability. However, some of the expenses are likely to be covered with government funding. The company is focusing on liquidity preservation and delaying the expansion of the new project. The company continue to pay the dividend amid the challenging time, which is encouraging from the income investors point of view. At the last traded price, the stock was offering a dividend yield of 9.4%, which is lucrative considering the current interest rate environment. However, dividend seems a bit inflated owing to the recent price correction. We have valued the stock using EV/EBITDA value-based relative valuation method and have arrived at a target upside of double-digit (in percentage terms). For the said purposes, we have considered peers like Chartwell Retirement Residences, Boardwalk Real Estate Investment Trust etc. The business model is resilient in nature and is directly correlated with the ageing population. We believe, the sectoral weakness is temporary in nature, and the occupancy rate would stabilize in the coming days as the situation normalizes. However, the company has a long term debt to capital ratio of 46.6%, which is higher than the industry average of 30%. Higher debt servicing cost might pose a challenge in the near to medium term. Hence, considering the aforementioned facts, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of CAD 9.95 on July 27, 2020.

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

Disclaimer

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