What To Make Of The Estia (EHE) Report

The Estia Health Ltd (ASX: EHE) share price rose 8% today after it delivered a strong result despite a challenging period for residential aged care providers.

Highlights From Estia’s Report

Estia recorded a net profit after tax (NPAT) of $41.3 million which was in line with the 2018 financial year (FY18) result. Earnings before interest, tax, depreciation and amortisation (EBITDA) was up 4% to $94 million on the back of a 7% increase in group revenue to $586 million.

A key figure that Estia Health monitors closely is the average occupancy rate of its centres, which was ~94% for during FY19. This was seen as a very solid outcome given occupancy rates across the industry had come under significant pressure in the past 12 months.

The higher the occupancy rate, the better, since it means more beds are being utilised and generating revenue Estia Health. The company reported that the spot occupancy rate was at 94.1% on August 16.

Estia has continued to expand its operations to take advantage of the growth in demand for aged care facilities. During FY19 the company invested $93.8 million in expanding and enhancing the ‘home’ portfolio. Estia is in a sound financial position with a net debt to equity ratio at 14%. As a result, the company’s management believe the company is well prepared for the new quality standards in the wake of the royal commission into aged care.

Estia Health’s board declared a final dividend of 7.8 cents per share which serves to maintain the full-year dividend of 15.8 cents per share. This places Estia shares on a healthy trailing dividend yield of 5.7%.

Estia’s Management Comments

Estia CEO Ian Thorley admitted it had been a particularly difficult year for the business saying:

“There is no doubt that this has been one of the most challenging periods for the aged care sector. Continuing to lift quality of care and amenity for residents, while maintaining our financial results, reflects the hard work and dedication of our 7,500 team members, our resident-centred operating model and our disciplined approach to managing costs and capital.”

In relation to the Royal Commission into aged care, Mr Thorley remarked that Estia is, “well prepared for the introduction of the new quality standards, with additional investment in quality management and resident care systems including staff education, technology development, customer engagement and service.”

Are Shares Cheap?

I think the aged care sector — which includes Estia’s peers Japara Healthcare Ltd (ASX: JHC) and Aveo Group (ASX: AOG) — is difficult to assess as it remains reliant on favourable government regulation. Adding to the regulatory uncertainty is the reputational damage caused by the Royal Commission. Only time will tell if the worst is now behind us.

Disclosure: At the time of publishing, Luke has no financial interest in any companies mentioned.

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