Why shares of Estia Health Ltd have crashed 32% this week

Things are not looking good for Estia Health Ltd (ASX: EHE) right now.

On Friday last week, the aged care operator’s share price closed at $4.92, down from a high of $7.84 late last year. Just four trading days later and the shares are fetching a mere $3.33, representing a loss of 32% and a 58% decline since peaking in November.

By comparison, Japara Healthcare Ltd (ASX: JHC) has fallen a little under 9% during the same time, with Regis Healthcare Limited’s (ASX: REG) decline limited to 1.3%. It also compares to a 1.6% decline for the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).

There are six factors behind this week’s shocking decline which truly stand-out.

The first was the group’s full-year earnings results announcement. On Monday, Estia reported a 50% increase in revenue – driven largely by acquisitions – while earnings before interest, tax, depreciation and amortisation (EBITDA) and net profit after tax (NPAT) rose 31% to $92.7 million and 16% to $51.8 million, respectively. Both were below guidance provided by the company at the half-year results in February.

What’s more, guidance for the 2017 financial year seemed pretty flat. Management expects EBITDA to rise by “at least” 13% for the year, compared to the 2016 financial year, which isn’t all that great for a company that is meant to be growing strongly (more on that in a moment).

Meanwhile, investors have been concerned about potential regulatory and government changes which could impact the group’s ongoing performance. The company confirmed that its business will be impacted by various factors, although to what magnitude remains unclear.

However, what could potentially be the biggest concern for investors right now is the swift dash for the exits made by founder and non-executive director Peter Arvanitis. Investors were informed of his resignation via a market announcement on Wednesday and told it was so he could “pursue his philanthropic and other business interests.”

Making matters even worse, he dumped 17,745,556 of Estia’s ordinary shares, representing a whopping 9.43% of issued capital in the business. The Australian Financial Review has reported that the block trade was handled by Citi at just $3.15 a share, which was a significant discount to the price at which the shares have traded at so far this week.

The AFR also reported that comments made by Estia’s CEO Paul Gregerson had indicated that the group’s expansion by acquisition strategy could no longer be sustained, instilling serious doubts amongst investors regarding the business’s future prospects.

Rather than taking a punt on Estia Health and hoping for a miracle of sorts, these three new breed blue chips could be far greater investment ideas. Each provides investors with stronger earnings and solid dividends, not to mention greater familiarity.

Motley Fool contributor Ryan Newman has no position in any stocks mentioned. 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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