Estia tipped to miss on occupancy guidance

Macquarie analysts tip Estia Health to lag on its occupancy guidance, but it could also rebound from the hit.

Macquarie’s report on Estia also pointed out the mix of payments the company now received from residents, with an increasing proportion selecting daily payments over a deposit. Picture: Jerad Williams.

Estia Health could miss on its occupancy guidance, analysts warn, but the troubled aged care provider is also tipped to bounce back from the hit.

Macquarie analysts have said that despite Estia reconfirming is earnings guidance range of $86 million to $90m, the investment bank did not expect a strong recovery in occupancy rates, which supported that guidance.

“In our view, the key assumption underlying this guidance is that the company can reverse occupancy trends,” the bank said in a note to clients.

“We have incorporated a recovery in the second half of 2017 but not to the same extent as the company’s guidance implies.”

The investment bank has reinstated its coverage of the aged care provider, with a price target of $2.75. Estia’s share price is slightly up today at $2.76 in early afternoon trade.

Estia recorded an average occupancy rate in the second half of 2016 of 94.4 per cent and the average year-to-date occupancy at the end of November had declined to 93.1 per cent.

Macquarie highlighted to its clients that assuming that average occupancy rate was 93.1 per cent for December and consequently 93.1 per cent for the 2017 first half, the average occupancy would have to be 94.3 per cent in the second half of the year for the company to hit its earnings target.

“This is close to the company’s record of 94.4 per cent in the second half of 2016, which seems a little ambitious at this point,” Macquarie’s analysts said.

“We have assumed that the company misses its target but still makes an improvement in the 2017 second half, reversing the declining trend.”

The bank’s analysts have set an earnings forecast for Estia of $86.7m, which is near the bottom of the company’s guidance range.

Macquarie’s report on Estia also pointed out the mix of payments the company now received from residents, with an increasing proportion selecting daily payments over a deposit.

Over the three months to the end of October, 45 per cent of incoming residents paid a deposit on a weighted average basis, which represented a significant reduction on the 70 per cent of residents that had paid a deposit on a weighted basis in the 2016 fiscal year.

Macquarie said it had carried out sensitivity analysis on the change in payments and concluded that the deposit cash flows would significantly reduce, and may even go slightly negative, if 55 per cent of incoming residents continued to opt for daily payments. But the analysts said the company could comfortably accommodate the change in payment preferences.

“It is important to note that the true mix is likely to be more weighted to RADs (refundable accommodation deposit) as residents frequently take time to make the deposit/daily payment decision,” the bank said in its client note.

“Then, if they opt for the deposit they need to raise sufficient funds. In the interim, the resident makes daily payments. This suggests that over time the deposit daily payments mix for the three months ending October are likely to see an increase in deposits over time.”