Softness in its home healthcare and nursing home operations are cause for a rating change for Extendicare (Extendicare Stock Quote, Chart TSX:EXE), says Echelon Wealth Partners analyst Doug Loe, who in quarterly review on Monday rated EXE a “Hold” (previously “Buy”) while lowering his target price from $9.00 to $7.75.
Extendicare reported its fourth quarter fiscal 2018 financials on February 28, coming in with revenue of $288.8 million, a 2.6 per cent year-over-year increase, EBITDA of $22.5 million and adjusted funds from operations (AFFO) of $12.6 million or $0.142 per basic share, a $3.1-million decrease from a year prior.
Loe says the Q4 revenue was in line with his expectations but that the EBITDA margin of 7.8 per cent was below the margin from both the last quarter and Q4 of 2017.
The analyst contends that EXE can comfortably fund its current annual dividend of $0.48 per share, which works out to be a 6.6 per cent yield, and thus, that the stock should remain attractive for longer-term investors. Further, he says that he’d be a more aggressive buyer of the stock if the share price dips below $7.00 during the upcoming 12 months. (EXE is currently trading in the mid-$7.00 range.)
“Our key takeaway is that while Extendicare continues to generate sufficiently robust AFFO to fund current dividend policy and has in all quarters since FQ415 (when payout ratio transiently spiked up to 109 per cent), we do expect pending FQ119 financial data to be seasonally soft for both nursing home operations and home healthcare operations and we thus believe that a transient shift to a ‘Hold’ rating from ‘Buy’ is reasonable, at least until we have improved visibility on home healthcare operating margin trajectory,” says Loe.
The analyst is now calling for 2019 consolidated revenue and EBITDA of $1.12 billion and $93.3 million and 2020 consolidated revenue and EBITDA of $1.13 billion and $101.8 million.
His target price represented a projected return, including dividend, of 12.7 per cent at the time of publication.