Extendicare is still a Buy, says Leede Jones Gable

Continued strong quarterly numbers have Douglas Loe of Leede Jones Gable feeling confident about long-term and home care company Extendicare (Extendicare Stock Quote, Chart, News, Analysts, Financials TSX:EXE). Loe maintained a “Buy” rating and target price of $8.25/share for a total return of 14.4 per cent in an update to clients on Monday.

Founded in 1968 and headquartered in Markham, Ontario, Extendicare offers long term care services, retirement living services and home health care services like nursing care, occupational, physical and speech therapy, assistance with daily activities and contract and consulting services to third parties.

Loe’s latest update comes as Extendicare reported its fourth quarter results for the 2021 fiscal year, along with year-end totals.

“As with the prior three quarters in F2021, the quarter exhibited strong sequential growth on net operating income both in absolute terms and on a relative margin basis, giving us added confidence that the firm’s foundational operations and dividend policy are well-positioned,” Loe said.

Extendicare’s financial quarter was headlined by $319.4 million in revenue, which beat the Leede Jones Gable estimate of $313.4 million and produced a three per cent sequential increase, as well as year-over-year growth of 3.8 per cent.

Meanwhile, the company’s EBITDA came in at $27.7 million for the quarter, which also beat the Leede Jones Gable estimate of $20.7 million and yielded 43.4 per cent sequential growth, along with a year-over-year increase of nearly 4,100 per cent.

Extendicare also reported a consolidated operating margin of 13.1 per cent, significantly outpacing the five per cent margin reported in the same quarter of 2020, and getting well ahead of the Leede Jones Gable estimate of a 10.3 per cent margin.

Another Extendicare highlight in the quarter was the start of construction of a 256-bed long-term care facility in Stittsville, meaning the company now has three projects under construction in Ontario as it tries to build on the 1.8 per cent sequential growth in home health care average daily volume and a 7.7 per cent year-over-year increase.

“While we were pleased with our progress in the fourth quarter, the emergence of the Omicron variant drove a dramatic increase in outbreaks across our long-term care homes and retirement communities in January,” said Dr. Michael Guerriere, President and Chief Executive Officer of Extendicare in the company’s February 24 press release. “Despite the prevalence of the virus within the community, high vaccination rates among our residents and staff were significant factors in mitigating serious illness and hospitalization. Protecting our residents, caregivers and staff continues to be our top priority.”

After the company finished 2021 with $1.26 billion in revenue, Loe maintains his view that Extendicare will continue to generate ten-figure revenue totals, though the 2022 year-end projection of $1.23 billion for 2022 produces a small year-over-year decrease, which can be attributed to the company’s assisted living revenue dropping from $49.8 million to $11.1 million after selling off its Esprit retirement living portfolio for $307.5 million. 

From there, Loe projects another year-over-year revenue decrease to $1.182 billion in 2023 with the assisted living revenue coming completely off the books, with 2024’s revenue projection remaining relatively flat at $1.183 billion.

Meanwhile, Loe projects the company’s EBITDA bounceback to continue, forecasting EBITDA of $70.7 million for a 5.6 per cent margin, and is a 69.5 per cent increase over the $41.7 million in EBITDA reported in 2020. Loe forecasts the EBITDA to step up to $90.3 million for a 7.4 per cent margin, then increasing to a projected $92.9 million in 2023 for a 7.9 per cent margin, effectively bringing the margin back to pre-pandemic levels.

From a valuation perspective, Loe projects the company’s Price/AFFO multiple to drop from 12.8x in 2021 to 11.5x in 2022, then to a projected 11x in 2023. The EV/EBITDA multiple follows a similar path, with Loe projecting the multiple to drop from 10.7x in 2021 to 9.1x in 2022, then to a forecasted 8.9x in 2023.

“Though EXE has achieved modest price appreciation (6.3per cent) since we upgraded the stock in early Feb/22 to a BUY, we believe there is sufficient upside from current levels to justify our positive rating, especially when considering F2021 EBITDA growth trajectory that we expect to continue into F2022, if perhaps with some choppiness in the current quarter,” Loe said.

Extendicare’s share price has excelled over the last 12 months with a ten per cent return and a 3.2 per cent return since the start of 2022. After hitting a 52-week low of $6.59/share on November 30, the stock has bounced back, though it has not matched its 52-week high of $8.66/share, set on June 25.