Residential aged-care provider Estia Health Ltd [ASX:EHE] has seen a significant drop in their share price today, currently sitting at $2.85 a share. This is a 4.68% decrease from yesterday’s trading, and puts the company’s one-year return at a negative of almost 16%.
Earlier this morning, Estia released a trading update on the ASX prior to their full year FY19 results being released on 20 August, to warn investors that financial results will be ‘lower than previously anticipated’.
The market clearly hasn’t responded well to the news.
Aged care royal commission hits Estia hard
In their FY19 half-year results presentation, Estia had a predicted full-year EBITDA guidance of a ‘low to mid single digit percentage increase on FY18 EBITDA’. This was lower than the guidance outlined in the full-year results for FY18.
In today’s update, however, Estia gave a new estimate for FY19 EBITDA of $92–$94 million. While this will be a positive climb from the FY18 EBITDA ($90.1 million) by as much as 4.1% — arguably a low to mid-single digit increase — the company admits this is lower than what they were initially expecting.
According to the company, the blow to earnings is largely impacted by ‘continuing adverse publicity in the sector’ resulting from the aged care royal commission, which has set the company back $2.3 million in FY19.
The fact that Estia’s EBITDA won’t reach even a 5% increase despite an additional government funding boost of $9.7–$10.2 million, speaks volumes of how much strain this commission is placing on the company.
Earnings were also impacted by beds and bugs.
Estia have also decided to close their Mona Vale facility so they can ‘accelerate the re-development of a well-positioned site’. After the closure, as of 23 May, bed occupancy for the company was at 93%. Estia noted that if occupancy remains at this level, full-year EBITDA will be as much as $3 million less than expected.
In addition, the relocating of all Mona Vale residents and the compensation of staff members has pushed FY19 EBITDA back a further $0.6 million.
On a more sombre note, an influenza outbreak in South Australia has also led to declining occupancy rates. Though such a circumstance is out of Estia’s control, it will no doubt lead to further negative impact on earnings.
What this means for investors
While the Morrison government’s aged care royal commission is underway, this sector of the market is subject to a large amount of negative press, which will likely deter investment appeal.
In saying that, Estia did note in this latest update that their significant refurbishment program ‘has continued to schedule’ despite all these financial setbacks.
The plan, which is on schedule to have nearly two thirds of their homes qualifying for the Higher Accommodation Supplement by the end of this year, may add some positive light on the company in the midst of the royal commission.
Though with two negative revisions of the FY19 guidance under their belt, it’s unlikely the company will see any kind of uptrend forming until before FY20.
For Money Morning
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