Healthcare stock is analyst’s top pick for 2020

Healthcare stock Extendicare operates over 120 long-term care and retirement home facilities across Canada and runs its home care business through 35 branches across the country.

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A horse therapy event takes place at the Prairie Mentoring Centre for Therapeutic Riding in Regina for residents of Riverbend Crossing by Esprit Lifestyle Communities (a division of Extendicare) in Saskatchewan.

Healthcare stock Extendicare Inc. (TSX—EXE) management met with Laurentian Bank security analysts in early January and the progress of Extendicare’s home care division and its long-term care redevelopment program were the main topics of discussion.

According to Laurentian’s Toronto-based equity analyst Yashwant Sankpal, the home care division should see between six per cent to seven per cent volume growth and progress towards 11 per cent to 12 per cent margins in 2020.

Service volumes are also likely to increase between six per cent and seven per cent with the implementation of new scheduling software anticipated in May 2020.

The home care division has a team of 480 people scheduling the shifts of over 10,000 care givers. Management expects to reduce the size of the team by half with the new information technology system in place.

“Recall that in 2019, Extendicare had to forgo about 20 per cent of its daily allocation of 30,000 hours, mainly because of staff shortage and scheduling issues,” the analyst comments.

Inefficient scheduling was leading to less optimum utilization of the front-line staff, leading to higher than normal turnover. With the new scheduling system in place, management expects to recover this gap over the next two to three years.

Mr. Sankpal maintains his ‘buy’ recommendation and $10 target share price.

Redevelopment and new construction under way

Based on the company’s recent discussions with the Ontario government, management expects to see meaningful changes to the capital subsidy and a kick-start to the province’s class C redevelopment program. The analyst says Extendicare hopes to start the construction of one to two facilities in 2020.

Extendicare currently has 21 class C facilities and if it were to redevelop every facility between the next five years to 10 years, the total budget would be in the $1 billion range.

Extendicare expects to generate levered returns of between eight per cent and 10 per cent, assuming a 75 per cent debt to equity ratio.

Mr. Sankpal says funding these projects should not be a big concern as Extendicare currently has around $100 million of liquidity, an under-levered balance sheet and a 70 per cent adjusted funds from operations payout ratio.

Overall, the analyst chooses Extendicare as his top pick for 2020.

This is an edited version of an article that was originally published for subscribers in the February 7, 2020, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.

Investor’s Digest of Canada, MPL Communications Inc.
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