As a general rule, I don't like to buy new Initial Public Offerings (IPOs) before I see their first full-year annual report and Estia Health Ltd (ASX: EHE) is no exception.
Having risen 32% in the nine months or so since it listed, today's report is a valuable opportunity to check in on this aged care provider.
The What
- Revenue of $297.5m, 0.4% above prospectus
- Statutory loss after tax of $22.5m
- Underlying Net Profit After Tax ('NPAT') of $44.6m
- Dividend of 14 cents per share, higher than prospectus of 13 cents
- 48 facilities, 4 more than prospectus forecast
- Staff costs remained in line with prospectus at 58.9% of revenue
- Targeting 10,000 places by 2020, with 3,203 as at 31 July 2015
- $46.2m cash at bank
So What?
Like AGL Energy Ltd's report earlier today, converting the statutory loss of $22.5m into an underlying NPAT profit of $44.6m requires some mental gymnastics and, unlike AGL, most of these one-off costs appear to be cash charges (i.e., costing real cash rather than reflecting a change in value of an asset).
Most of the difference is made up by IPO costs ($3.1m), a change in financing structure and interest expense ($32.9m) and stamp duty on acquisitions ($27.2m). So if you ignore the fact that Estia had to pay for its IPO, stamp duty, and interest expenses then yes, it made a profit for the year.
Alas, we live in the real world and I believe the statutory loss of $22.5m is a more accurate figure in this particular case. Thanks to its rapid acquisitions, Estia blew through a load of cash and accrued $54 million of debt in the year as well.
One item to catch my attention was the fact that Estia spent a good portion of its customers' Refundable Accommodation Deposits (RADs) during the year. These deposits are treated essentially as an interest free loan from the customer to Estia, yet they must be refunded (minus the cost of accommodation) if and when a customer parts ways with Estia.
With $46m cash at bank Estia appears well funded to cover required refunds, but given its ambitious plans for growth (more on that below) and negative cash flow investors will want to watch that the company maintains an adequate cash balance.
Now What?
Estia is aiming to triple the size of its business by the end of financial year 2020. This is going to require a lot of purchases, a number of more risky 'greenfield' developments (building their own facilities) and a lot of cash.
Major cash outflows were the order of the day for Estia in 2015 and the shortfall had to be funded by debt. With its plans for expansion I believe that management is only going to take on more debt (though its ability to repay debt should also rise) and Estia is also likely to remain free cash flow negative for the foreseeable future.
A capital raising?
Management hasn't hinted at it yet but I would not be surprised to see some sort of rights issue to fund future expansion. Estia's share price is pretty buoyant and with the business growing by leaps and bounds it makes some sense to see the number of shares on issue increase.
If and when that happens I would encourage management to remember that retail shareholders are people too and deserve a similar slice of the pie to institutional owners.
Well, should I buy Estia?
That depends on your tolerance for risk. I like the defensive properties of Estia's industry and the company's growth potential, but its strategy carries a lot of risks. Government regulation is a major one, as are the risks associated with acquisitions, development and rising debt.
With that said, Estia appears to have pulled off a successful IPO and the company is definitely worth a closer look.
