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Extendicare is still a pass, says Leede Jones Gable

COVID-related costs are putting a pinch on earnings for Canadian long-term care company Extendicare (Extendicare Inc Stock Quote, Charts, News, Analysts, Financials TSX:EXE), according to Leede Jones Gable analyst Douglas W. Loe, who delivered a report to clients on Monday where he reiterated a “Hold” rating on the stock.

Markham, Ontario-based Extendicare, which has long-term care, retirement residence and home-care services in three Canadian provinces, announced its fourth quarter and full 2022 earnings last week. The company’s Q4 revenue was up 1.4 per cent year-over-year to $310.4 million and adjusted EBITDA down to $9.2 million compared to $24.5 million a year earlier. For the year, revenue was up 4.7 per cent to $1,221.6 million and adjusted EBITDA was down to $57.5 million compared to $80.6 million in 2021.

“Q4 was a challenging quarter as we carefully managed our operations through the final stages of the pandemic, which left high inflation, rising interest rates and an extremely tight labour market in its wake,” said President and CEO Michael Guerriere in a press release. “Governments continue to provide support for elevated pandemic costs, although the extent and timing of funding lagged, putting pressure on our financial results in the quarter.”

Looking at the quarterly results, Loe said the Q4 represented the second consecutive quarter where Extendicare did not generate sufficient EBITDA and adjusted funds from operations (AFFO) to fund its dividend payout for the period. Loe said the problem isn’t necessarily in the company’s operations, which saw nursing home occupancy and healthcare service hours trending upwards, but from a mismatch between funding and expenses in the pandemic period.

But Loe is confident that the issue that will get sorted by government funding eventually.

“The key takeaway is that Extendicare’s core nursing home and home healthcare operations primarily in ON/AB (it has divested many of its operations in BC/SK in recent quarters) continue to incur COVID-19-related costs without matching funding from the respective provinces,” Loe wrote.

“This is a trend that we not only expect to reverse but which must reverse in order to ensure industry viability in future periods. Growth capex projects either ongoing in ON or about to be should specifically augment nursing home capacity within Extendicare’s existing portfolio and thus provide supplemental operating income for the firm to fund its current dividend policy in future years,” he said.

On the company’s dividend, Loe said the current yield of 7.3 per cent represents attractive value for yield-conscious investors and that his price target, a maintained $7.00 per share, implies a total 12-month return of 14.2 per cent, which is “approaching Buy territory” in Leede Jones Gable’s rating hierarchy.

Loe is nevertheless maintaining his “Hold,” saying, “We believe that sustained caution on share price appreciation is warranted until we see clear evidence of quarterly AFFO growth over and above annual dividend payout, a threshold that Extendicare was able to routinely exceed in pre-pandemic quarters.”

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About The Author /

Jayson is a writer, researcher and educator with a PhD in political philosophy from the University of Ottawa. His interests range from bioethics and innovations in the health sciences to governance, social justice and the history of ideas.
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