Residential aged care has been especially affected by COVID-19 impacts for over two years, and yet Estia Health has done well to chart a course through the chaos. The sector has been dealing with a new regulatory and compliance regime at the same time.
EHE’s 1H22 EBITDA increased 66% to $33.5 million, including $12.1 million of direct COVID-19 costs of which $7.5 million can be reimbursed by grants to be received in 2H22.
It also achieved a 200bp increase in occupancy to 92.6% across its 6,058 beds although spot occupancy slipped to 90.1% on 18 February 2022 as Omicron swept through the country.
Net RAD inflows of $23.9 million included $19 million from mature homes, $9 million from greenfields and -$4 million from closures. Incoming RAD prices lifted 4% to $446k.
Importantly, this was the first period since FY16 that the group saw positive ‘jaws’ where government revenue per occupied bed per day increased 8% against staff costs per available bed per day increase of 4.5%. This was partly due to the $10 per day fee supplement implemented from 1 July 2021.
Direct COVID costs should begin to recede as occupancy rates begin to recover through 2H22f.
Further detail was provided on EHE’s freehold land assets including 838k sqm of predominantly metro property across NSW, Victoria, South Australia and Queensland. The majority of the assets have an old valuation date prior to CY16 and yet the Australian residential price index is up more than 30% over the last five years. The company says it can leverage this asset base to access capital in the future if required. The on-going demand for appropriate sites remains heightened.
Investment view
EHE is a quality operator in the sector with strong operational execution and prudent capital allocation. Adjusted net debt to EBITDA is less than 0.5x with the buyback, acquisitions and greenfields projects all on the table.
The Government needs to provide greater clarity on future funding commitments although with an impending Federal election, this may be the reason. The funding model transition is set to occur in October 2022, and we think this looms as a key catalyst for the sector in the next 6 months.
Risks to investment view
The regulatory regime for residential aged care has been reorganised but future changes may occur under a different government policy. Demand for EHE’s aged care facilities could decline if competitors offer a superior product.
Recommendation
We have retained our Hold recommendation.
