Positive signals are coming from Extendicare, says Echelon

Echelon Wealth Partners analyst Doug Loe says there are positive signs coming from Extendicare (Extendicare Stock Quote, Chart, News: TSX:EXE).

On Friday, Extendicare announced it would expand its home health business into the Vancouver Coastal Health Authority. The company’s home health division, ParaMed, was awarded a government contract worth $11.5-million, annually.

“With our success in earning this business through a competitive request for proposal process, we have demonstrated our continued ability to grow in new geographic areas,” said CEO Tim Lukenda. “This will significantly increase our presence in British Columbia, and we look forward to welcoming these new clients and staff.”

Loe says this contract will modestly impact his fiscal 2016 and 2017 forecasts, says it is nonetheless “directionally positive” and demonstrates the company’s potential to expand geographically.

“The new contract, though it does not dramatically move the needle on our valuation and home healthcare forecasts, is still a positive signal to us that Extendicare’s Paramed operations have room to grow into the fragmented Canadian home healthcare universe, and thus maintain its national leadership status in this not-yet-as-core-as-it-should-be healthcare services niche,” says the analyst. “Our previous F2016/17 home healthcare revenue forecasts of $382.0M/$385.8M are both modestly increased by the new BC homecare contract to $389.9M/$397.3M after giving effect to new BC-derived home health revenue projected by us to be $7.9M/$11.5M, with Paramed average operating margin of 11.7%/11.8% thus corresponding to operating income accretion in F2016/17 of $0.9M/$1.4M, respectively.”

In a research update to clients today, Loe maintained his “Buy” rating and one year price target of $10.50 on Extendicare, implying a return of 13.5 per cent at the time of publication.