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Estia Health Ltd in trading halt and it doesn’t look good

Estia Health Ltd (ASX: EHE) has placed its shares in a trading halt while it prepares an update on its first quarter trading for the 2017 financial year.

For an aged care centre operator like Estia, the move appears highly unusual for a number of reasons. Revenues should be regular and easily predictable, given the demand for aged care places is high, the number of beds and customers doesn’t change rapidly, and expenses should be predictable.

More than likely it means the quarterly update is going to be bad news, and that’s probably why fellow aged care operators Regis Healthcare Ltd (ASX: REG) and Japara Healthcare Ltd (ASX: JHC) have seen their share prices tumble 5% and 7% respectively in trading so far today.

In late August, Estia announced that it expected the financial year 2017 (FY17) earnings before interest, tax, depreciation and amortisation (EBITDA) to be at least 13% higher than FY16’s EBITDA of $92.7 million or above $104 million.

That’s despite forecasting higher interest expense of around $12 million and higher depreciation of between $17 and $20 million. Estia also says it expected total capital expenditure to come in between $36 and $44 million.

The aged care operator did note that the federal government changes to residential aged care funding would need a less than 2% shift between government and resident contributions this financial year. It’s likely that this figure will change – and could even be in line with a more severe impact felt in FY18.

We’ve noted before that the residential aged care sector is highly risky given the high dependence on government funding for revenues. The impact has already been felt with the share prices of Estia, Regis and Japara sinking 43%, 17% and 38% in just the past six months.

Foolish takeaway

Estia Health is likely to see its share price hammered once the update has been released and trading resumes. Look out below.

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Motley Fool writer/analyst Mike King doesn't own shares in any companies mentioned. You can follow Mike on Twitter @TMFKinga

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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