Econ Healthcare - Watch For Headwinds
- See Econ Healthcare's announcement dated 09 Nov 2022 for its 1HFY23 (Mar 22 to Sept 22) earnings update:
1HFY23 financials came below our expectations.
- Econ Healthcare (SGX:EHG)'s 1HFY23A revenue and pre-tax profit came in at S$21.2mil (up 10% h-o-h, 8% y-o-y) and S$2.0mil (-23% h-o-h, 27% y-o-y) respectively, which formed ~40% of our previous estimates.
- Revenue growth was supported by an increase in the number of occupied beds, mostly attributed by the commencement of Econ Care Residences (Henderson) in April 2022. As a form of reference, as at 1HFY23A, operations in Singapore contributed 87% to Econ Healthcare’s top-line revenue, vs Malaysia at 12% and China at 1%.
- However, occupancy rates came at 78% in 1HFY23A (vs. 81%/84% in FY21A/FY22A) below our expectations – Since March 2022, Econ Healthcare’s Singapore operations added 28 beds (1HFY23A saw 852 occupied beds, up from FY22A’s 824 beds) despite the commencement of its new Henderson facility in April 2022, which came below management’s previous guidance of 30 beds per month upon commencement.
- In our view, Singapore’s slower-than-expected ramp-up in occupancy could be attributed to the ongoing concerns around the COVID-19 pandemic.
Watch for staff costs and operating expenses.
- Staff costs (as a % of revenue), the largest expense for Econ Healthcare, increased to ~54% in 1HFY23A (vs. ~49%/50% in FY21A/FY22A), due to additional staff costs relating to overtime payment, salary increments, and short-term contracted fee payments. Further, utilities expenses (as a % of revenue) also increased to 3.7% in 1HFY23 (vs. 2.5%/2.7% in FY21A/22A) in lieu of higher electricity tariffs in Singapore.
- As such, pre-tax profit margins declined to 9.3% (vs. 13.3%/10.5% in FY21A/FY22A).
- In our view, we could see staff costs (as a % of revenue) come down slightly from its 1HFY23 peak of 54% as Econ ramps up its Henderson and Chongqing facilities, albeit likely to remain above 50% amid continued wage pressures.
- Further, although management has shared that the government may continue to provide subsidies’ assistance in relation to rising staff costs, we note that recent measures released in the Singapore Budget 2022 could lead to future increases in qualifying income for S-passes and progressive wages (for administrative assistants) (effective 1 Sept 2022). This could lead to upward pressure on staff costs from FY23F onwards.
Expansion plans on track.
- Econ Healthcare’s 280-bed nursing home in Changshou, China, and 732-bed nursing home in Jurong are on schedule for opening in 2HCY22 and 2025, respectively.
Healthy balance sheets.
- Econ Healthcare’s financial position remains healthy, with a cash balance of S$25.2mil as of 30 Sept 22.
- Econ Healthcare has declared an interim dividend per share of 0.23 cents (aligned with 1HFY22A of 0.22 cents). See Econ Healthcare's dividend history.
Maintain HOLD recommendation on Econ Healthcare with lower target price of S$0.22.
- We trimmed our FY23F/24F earnings estimates by 18%/12% by assuming
- lower occupancy rates of 72% (vs. previous estimate of 79%), and
- higher staff costs of 52.5% (versus previous of 49.3%).
- Our target price for Econ Healthcare is based on a 15.5x Forward P/E ratio on a FY23F/24F blended basis (vs. 16.5x previously).
Above is the excerpt from report by DBS Group Research.
Clients of DBS may access the full report in PDF @ https://www.dbs.com/insightsdirect/.
Paul YONG CFA DBS Group Research | Singapore Research Team DBS Research | https://www.dbs.com/insightsdirect/ 2022-11-10 2022-11-10
Previous report by DBS:
2022-06-03 Econ Healthcare - Still Under A Cloud Of Uncertainty.