Set for a Smooth Transition
The latest development from Estia Health (ASX:EHE) has been the announcement that the current CEO and MD, Ms Norah Barlow, is stepping down from November. She has steered the ship successfully during an important transformation phase for the company, with Estia now on a much firmer footing than two years ago. We have no qualms about her replacement, with Mr Ian Thorley, the current COO, taking over the role. We expect the transition to be a smooth and highly positive one given his extensive background and experience. This also could herald a shift in the company from a “turnaround” phase to “momentum building”. We maintain our BUY rating.
What’s New?
Since our last coverage of the stock back in June (FAT-AUS-878) there has been one key update, which came last week (23 July) as the company announced that the current CEO and Managing Director, Ms Norah Barlow (pictured below), would be stepping down from her office in November.
Source: Estia Health (ASX:EHE) Company Website
Her departure from the company comes following a period of significant transformation for Estia. As a recap, back in late 2016, Estia Health faced significant financial troubles when the company, then under the leadership of Paul Gregersen (former CEO) and founder Peter Arvanitis, fell into hot water. Estia came under increased government scrutiny on its operations, in addition to concerns around debt levels, strategy and issues on governance and accounting, not to mention difficulty integrating its rapid acquisitions.
The company, in the past, used to fund its rapid expansion with Refundable Accommodation Deposits (RAD) which are essentially the deposits that customers give Estia on arrival into their new aged care facility. Note that these are technically rolling liabilities and have to be paid out when a customer/resident leaves or passes away.
The company then used a substantial portion of the RADS as interest free financing (this was allowed by the federal government) though if not managed well, this could lead to financial issues where cash flows become mismatched due to the company paying out more in deposits (RAD) than what a new customer comes in on and pays.
This eventually spiralled into its own crisis with the company seeing massive debt levels, missing earning estimates and the departure of its previous leadership from Chairman to CEO and other C-level executives.
Following that point, Ms Norah Barlow, then a non-executive director, was appointed to the CEO role and revised the company’s strategy, turning away from an expensive acquisition strategy towards organic growth – that is adding up its landbank and developing new centres.
The rest as they say is history, and in a span of almost two years, Ms Barlow has managed to turn around, with the company declaring its first interim dividend in 2 years and a mid-single digit increase in EBITDA. The company has now emerged from that tumultuous period stronger than ever – in fact, net debt has been slashed by more than half (-58.7%) while cash flows from recurring earnings (adjusting for construction and expansion) have now been climbing up.
Source: Estia Health (ASX:EHE) 06 June 2018 Company Presentation
Given that Ms Barlow has steered the company from a stressful period successfully, she now wishes to end her contract on a strong note and to return to her home in New Zealand. As we’ve noted in our previous reports, we hold her in high regard and believe that such a move is well earned.
Ms Barlow, will now be turning over the CEO reins to current COO (Chief Operating Officer) and Deputy CEO, Mr Ian Thorley (pictured below):
Source: Estia Health (ASX:EHE) Company Website
On Mr Thorley’s background, he has had quite an accomplished career in the health and aged care sector with over 30 years’ experience in senior leadership roles (think: CEO and COO roles in large private hospitals and aged care groups).
Given his long tenure in the industry, he has been at the forefront of all the major developments that shaped Australia’s healthcare sector from privatisation of public hospitals to new reimbursement and funding models. He has also consulted for the benefit of various health insurers, health logistics and health recruitment groups as well as served as a Non-Executive Director in veracious private equity owned and ASX listed companies.
Given the transition, one key question then is whether the company’s direction or strategy will change given new leadership? We don’t believe so as Mr Thorley was part of the team that helped turnaround the company since his appointment in the role as COO last 24 October 2016 by Norah Barlow.
Mr Thorley also had a significant hand in leading operations to grow revenue and deliver operational efficiencies. Our view is that the new leadership will focus more on continuation of the growth strategy outlined below
Source: Estia Health (ASX:EHE) 06 June 2018 Company Presentation
We expect the full fruits of Ms Barlow and her executive team’s labour will be evident when the company reports full year results on 16th August.
Turning to the charts, and on the daily, prices have dipped below both the 50 day (red line) and 200 day (green line) moving averages, which is suggestive of momentum to have swung south. This however needs to be placed in context of a strong share price rally that unfolded from the middle of last year. Resistance located at the May high of $3.63 remains in close focus, while support exists at this year’s low of $3.09. A move above the 50 day moving average, and downward trend-line around $3.30 would improve the technical picture.
On the monthly, the share price touched an all-time low of $2.06 in September 2016 to form a ‘bullish doji’ candlestick formation. Positively, the highest price of this candle of $3.41 was surpassed in October 2017. This was a bullish development and signalled a medium-term upward shift in momentum. Prices are currently below this level, and a move back above here is needed to improve the outlook, and increase the probability remains for an eventual ascent in share price towards the next band of resistance evident between $4.11 and $4.74. This is made up of the 38.2% and 50% Fibonacci retracement levels respectively.
Summary
The latest development from Estia Health (ASX:EHE) has been the announcement that the current CEO and MD, Ms Norah Barlow, is stepping down from November. She has steered the ship successfully during an important transformation phase for the company, with Estia now on a much firmer footing than two years ago, We have no qualms about her replacement, with Mr Ian Thorley, the current COO, taking over the role. We expect the transition to be a smooth and highly positive one given his extensive background and experience. This also could herald a shift in the company from a “turnaround” phase to “momentum building”.
In the long run, the underlying thematic remains a compelling one. Australians are living longer, and many baby boomers are set to retire over the next two decades, increasing the demand for high quality aged care services. This is particularly as studies show that most retirees will need to cash up equity in their own homes, and move into care to sustain themselves in their golden years.
Estia Health (ASX:EHE) shares are trading on a FY18 earnings multiple of approximately 17 times, with a projected yield of 2.6%, rising to 4.7% in FY19. Estia Health will remain in the Fat Prophets portfolio. For Members without exposure we recommend the shares as a buy around current levels.
Disclosure: Estia (ASX:EHE) is held in the Fat Prophets Concentrated Australian, and Small & Mid-cap managed account portfolios.
