Estia Health’s NPAT falls, Slashes Dividend

The Australian government supports a variety of aged care residences in Australia. This means that reasonable support services and care can be retrieved by individuals who need it. Approximately 70% of the cost of supporting an aged care resident currently comes from government funds rather than the resident.

The government directly pays subsidies to the aged care residents and the amount of funding a residence gets is based on the following:

• the assessment of an individual’s care requirements by the home, which is processed using a tool named as the Aged Care Funding Instrument (ACFI).
• how much one person can afford to contribute to the cost of care and accommodation by using assets assessment and income.

It is anticipated that the healthcare sector will have numerous opportunities in the forthcoming years, and spending in this sector is projected to rise at a compound annual growth rate (CAGR) of 5% in 2019-2023.

The drivers that are responsible for the growth of the healthcare sector in upcoming years are increasing prevalence of chronic diseases, aging demographics, and advancements in the technology, among others.

The graph below represents the spending by the Australian government, and it could be determined that in the last five years, the government had spent the maximum in residential care followed by home care and support.

Government spending on aged care services by spending type in Australia, from 2012–13 to 2017–18:

According to the 2019–2020 Budget, the Australian government is investing approximately $104 billion in health, aged care and sport in 2019-2020. About 60% of the total budget would be used for life-saving medicines and health, aged care and support.

Despite the budget provided by the Australian government for the aged care service providers, one of the ASX-listed aged care players has recorded a drop in its NPAT – Estia Health. Let us zoom the lens on this ASX-listed aged care stock.

Estia Health Limited (ASX:EHE)

Estia Health Limited, founded in 2005, is engaged in providing aged care assistance through owned and leased residential facilities across Australia. The fundamentals of the company are quality care, innovation, via specialised healthcare groups, and access to valuable advice.

Estia is one of Australia’s leading residential aged care providers and has 69 operational homes and employs more than 7,500 employees in Victoria, New South Wales (NSW), Queensland and South Australia.

FY20 Half Year results, NPAT declined by 32.1%

On 25 February 2020, Estia Health updated the market with its half-year results on the ASX with the company’s net profit for the first half declining by 32.1% to reach $14.3 million.

The board mentioned that the reason for this drop in NPAT is that the company ensured the quality of care and service despite government funding rates not being enough to cover up soars in operating costs, primarily staff.

The quick highlights from the half-year results presentation are:

Financial Highlights:

• The pre-AASB16 EBITDA on mature homes was reported at $40.9 million; a decline of 12.6% as compared to the previous corresponding period.
• The net profit after tax dropped by 32.1% to $14.3 million.
• During the H1 FY2020, the average occupancy was 93.7%.
• Net RAD inflows of Estia was $22.2 million during the first half, with a RAD balance of approximately $826.5 million at 31 December 2019.
• Capital investment in new homes and the enhancement of existing homes was around $46.3 million.
• The net debt of the company was approximately $96.6 million, with $211.0 million undrawn facilities.
• The company declared an interim fully franked dividend of 5.4 cents per share, representing nearly 100% of profit after tax.
• The operating cash flow of nearly $35.7 million, represents approximately 87% EBITDA to cash conversion.
• Mona Vale disposal profits of roughly $10.95 million would be collected in the second half of the financial year 2020.
• Estia has a strong, well-capitalised balance sheet with total assets of ~$2.0 billion supported by shareholders’ funds of $753.8 million.
• In August 2019, bank facilities of nearly $330 million were renewed in full.

Operational Highlights:

• For the first half of 2020, the average occupancy of 93.7% achieved in mature homes demonstrating growth in market share relative to the decline in sector occupancy. On 21 February 2020, the occupancy in mature homes was 93.6%. For the new Southport and Maroochydore homes, a strong market response was recorded.
• The company is engaged in designing its homes to create a community interface with a home-like feel and all Estia Health homes examined under the ACQSC have been re-accredited, three homes have unmet outcomes at the current time, and no homes have been or are under sanctions.
• Estia has invested more than $40 million over the last three years across 26 homes and 2,382 beds.
• The independent benchmarking of clinical indicators introduced in the first half of the financial year 2020 supports improvement in quality.
• Enhanced significant refurbishment plan continues with a total of 42 residences now eligible for the higher accommodation supplement and a further eight homes to be finalised in the second half of the financial year 2020.
• Further, a 118-bed greenfield project was added to the pipeline with the acquisition of the Aberglasslyn, NSW project and in Mt Barker, South Australia land was secured for the development of a new 116-bed home.

Outlook for FY2020:

• For the full-year 2020, EBITDA on Mature Homes on a pre-AASB 16 "like for like" basis within the range of $78 million to $82 million is anticipated.
• Capital investment for the second half of the financial year 2020 projected to be approximately $58 million to $64 million, and for the fiscal year 2021, it is expected to be ~$95 million to $105 million.
• Mature home RAD influxes for the rest year to be approximately in line with the first half of 2020.
• The dividend payment ratio to remain in the NPAT range of 70-100%.
• The strong balance sheet of Estia builds opportunities for investing in the development pipeline and continued refurbishments.
• The company anticipates publishing its final report in November 2020.

Stock Performance:

On 25 February 2020, EHE’s stock settled the day’s trade at $2.210, down by 3.913% compared to its previous close. The market capitalisation of the stock stood at around $600.51 million, with nearly 261.09 million shares outstanding. The 52 weeks high and low price of the stock was noted at $2.990 and $2.180, respectively. The EHE stock has delivered a negative return of 4.56% on a year to date basis and a return 13.21% in the last six months.

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