Take a pass on Extendicare, says Echelon Wealth

Expecting profit margins to grow by the end of 2019, Echelon Wealth Partners analyst Douglas Loe is upping his forecast on long-term care and extended living provider Extendicare (Extendicare Stock Quote, Chart TSX:EXE), but it’s still not enough to pull the trigger on the stock, he says.

In an update to clients Wednesday, the analyst reiterated his “Hold” recommendation with the new target of $8.25 (previously $7.75).

Markham, Ontario-based Extendicare announced its fiscal first quarter 2019 on Tuesday, generating revenue of $274.3 million, up one per cent year-over-year, and Adjusted EBITDA of $19.6 million, down $0.4 million from last year.

Loe called the results positive enough to comfortably fund its quarterly dividend payout at an 84.3 per cent payout ratio. As Loe predicted, Q1 repeated the operating income softness seen in Q4 from Extendicare’s home healthcare operations (at 7.4 per cent compared to Q4’s 7.3 per cent).

“On balance, FQ119 financial data were in line with our expectations, with long-term care and retirement living operations performing well by fiscal Q1 standards and with retirement living notably performing well on operating income of $2.6 million that was the second highest level in Extendicare’s recent history (dating back to FQ415 when the firm started acquiring/constructing new assisted living facilities in ON/SK), if not quite to margin levels for this division (were 27.1 per cent in the period) that were achieved in fiscal Q218/fiscal Q318 (28.5 per cent/29.8 per cent, respectively),” writes Loe.

The analyst has made modest adjustments to his fiscal 2020 forecasts, with revenue and EBITDA modification comes from the termination of Extendicare’s home healthcare contracts in BC, while he nonetheless sees a lift to Extendicare’s fiscal 2020 home healthcare operating income.

Loe is now calling for fiscal 2019 consolidated revenue of $1,117.0 million and EBITDA of $92.3 million and fiscal 2020 consolidated revenue of $1,090.2 million and EBITDA of $105.5 million. His price target reflects a projected return including dividend of 9.1 per cent at the time of publication.