Extendicare wins price target raise at Leede Financial

Extendicare (Extendicare Stock Quote, Chart, News, Analysts, Financials TSXV:EXE) is expanding its home healthcare footprint with a $75.5-million acquisition, and analyst Douglas Loe says the timing couldn’t be better as margins rebound and funding conditions improve in Ontario and Alberta.

Loe, an analyst with Leede Financial, said in a May 1 investors update that he is maintaining his “Buy” rating but has revised his target up from $16.00 to $16.50 for the stock.

Extendicare is a Canadian provider of long-term care, retirement living, and home care services, with operations across three provinces and a primary focus on long-term and home care in Ontario and Alberta.

The company is buying Closing the Gap Healthcare Group, a private regional home healthcare company, in a deal worth $75.5-million. The transaction is expected to close in the third quarter of fiscal 2025, so it won’t affect Leede’s financial forecasts for the first half of the year but will be factored in afterward.

“Extendicare augments its home healthcare operations and on attractive terms,” Loe said. “The mostly-ON-based home healthcare operation (it serves fifteen communities in the Greater Toronto Area and surrounding towns/cities, plus Halifax N.S., according to data provided in its 2023 annual report) generated T12M revenue of $84.2M & with an operating margin in the 10%-to-12% range on average, based on comparison to Extendicare’s own FQ224-to-FQ424 operating margin that ranged from 8.3% (in FQ124) to 13.1% (in FQ424).

“Extendicare explicitly guided us to assume that Closing the Gap’s margin profile is similar to its own trailing average. Accordingly, the transaction appears to value Closing the Gap at around 0.9x T12M revenue & about 8x operating income (assuming 11.4% operating margin, which was Extendicare’s quarterly average last year).”

Loe expects Extendicare to generate $606.1-million in adjusted EBITDA on $998.0-million in revenue for fiscal 2025, with those figures rising to $630.7-million in adjusted EBITDA on $1-billion in revenue in fiscal 2026.

He said it is strategically sound to accelerate home healthcare growth in a more favourable funding environment, particularly in Ontario and Alberta.

“We endorse the transaction both on a philosophical level (we have long been advocates for investing in home healthcare as an intermediate eldercare services niche preceding institutionalized or hospital-based care) and on a business risk level,” Loe said. “On the latter point, Extendicare’s home healthcare operating fundamentals have clearly improved in its post-pandemic era and we believe that the operating environment for home healthcare (and for all eldercare services that Extendicare provides) is as positive as it has been in many years, dating back to when Extendicare augmented home healthcare operations by acquiring Revera’s (private) home healthcare division back in FQ115, coincidentally for a similar cash outlay of $83M.”

The deal builds on steady improvements in operating margins across Extendicare’s long-term care and home healthcare businesses, following a tough stretch from 2020 to 2023. In 2024, the company’s adjusted home healthcare operating income rose to $62.8-million with an 11.5% margin, well above previous years. For comparison, that figure was $44.2-million (9.4%) in 2023, $22.5-million (5.3%) in 2022, $34.7-million (8.4%) in 2021, and just $8.7-million (2.4%) during the pandemic-hit year of 2020.

“The home healthcare funding environment is certainly improved in comparison to recent years, with the ON government conferring a 4.0% bill rate increase announced in mid-FQ424 retroactive to Apr/24 that should contribute positively to revenue/operating income in coming quarters, as did the 6.7% increase announced in FQ423 on F2024 home healthcare operations & profitability,” Loe said.

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