Extendicare downgraded by Leede Jones Gable

Douglas Loe of Leede Jones Gable is exercising more caution in regards to Extendicare (Extendicare Stock Quote, Chart TSX:EXE), downgrading from a “Buy” rating to a “Hold” while cutting his target price from $8.75/share to $7.75/share for a total return of 14.8 per cent in an update to clients on Monday.

Founded in 1968 and headquartered in Markham, Ont., 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 opening quarter results for the 2022 fiscal year, which he noted to be mixed as many prior pandemic-challenged quarters have been for the company.

“Long-term care (LTC) operations benefited from a combination of favourable pandemic relief funding for its ON/AB-based operations and the elimination of losses from now-divested SK-based LTC facilities but was offset by lower pandemic relief funding and other operating challenges within home healthcare operations,” Loe said.

Extendicare’s financial quarter was headlined by revenue of $305.7 million, which was in line with Loe’s estimate. Long-term care revenue accounted for 65.4 per cent of the company’s revenue mix at $199.8 million, while home health care marked a further 32.2 per cent of the mix at $98.6 million, with other revenue accounting for the difference.

On the margins, the company reported $19.5 million in adjusted EBITDA for the quarter for a 6.4 per cent margin, though Loe made note of ongoing fluctuations in trying to match COVID-19 funding relief to expenses.

“Excluding FQ420 and FQ122 just concluded, adjusted EBITDA has varied minimally in the last nine quarters,” Loe said. “In so doing, we believe this reflects positively on the economic fundamentals of Extendicare’s core eldercare services operations, notwithstanding the home healthcare headwinds that the firm expects to continue for the next quarter or two.”

Despite increased outbreaks and absenteeism on account of the Omicron variant in the quarter, Extendicare did get some relief as the Province of Ontario announced 2,624 additional beds for 12 of the company’s LTC redevelopment projects.

“Thanks to vaccinations, the impact of the virus was much milder than in previous waves,” said Dr. Michael Guerriere, President and Chief Executive Officer of Extendicare in the company’s May 12 press release. “Nevertheless, high numbers of staff absences because of illness or isolation requirements drove higher sick pay, overtime and temporary replacement costs in the quarter. Demand for our services remains high and when the pandemic subsides, we expect our recovery to resume.”

Since the release of the financial results, Extendicare officially closed the previously announced sale of its 11 retirement communities with over 1,000 suites in Ontario and Saskatchewan to Sienna-Sabra LP for an aggregate purchase price of $307.5 million, completing Extendicare’s divestiture from retirement living operations.

“With the successful closing of the sale of our retirement living operations, we are now firmly focused on growth opportunities in our long-term care and home health care segments, including the services we provide to senior living operators through Extendicare Assist and SGP Purchasing Partner Network,” Dr. Guerriere said on May 17.

With assisted living revenue now in the rearview mirror, Loe continues to forecast a downward trend in revenue for Extendicare, forecasting a 1.8 per cent year-over-year decrease to $1.24 billion for 2022 followed by a 3.1 per cent drop to $1.2 billion in 2023, then remaining relatively flat for 2024.

By contrast, Loe forecasts the company’s EBITDA to grow by 7.8 per cent to a projected $83.8 million in 2022 for a margin of 6.8 per cent, followed by a projected 11.4 per cent hike to $93.3 million in 2023, good for a 7.8 per cent margin.

In terms of valuation, Low forecasts the company’s EV/EBITDA multiple to drop from the reported 11.5x in 2021 to a projected 10.6x in 2022, then to a projected 9.5x in 2023.

Looking ahead, Loe believes the smart play on Extendicare is to adopt a wait and see approach for at least the next two quarters in relation to its EBITDA/AFFO growth.

“Our investment thesis on EXE continues to be caught between hops on how we assess business risk for the firm,” Loe said. “Because so much of Extendicare’s operations are government-funded (though with some private pay for private LTC accommodations and presumably some measure of private service in home healthcare at least for higher-acuity patients), we could see pandemic relief funding as just being a re-imagination of how to fund eldercare services in the provinces where the firm operates.”

A downward trend since the end of April has produced a loss of 5.1 per cent for Extendicare’s stock price since the start of 2022, dropping off after a peak for the year to date of $7.95/share on April 13 and falling as low as $6.87/share on May 12.