Long-Term Expansion Plans Intact

(+) Singapore operations remained resilient, with a new milestone achieved in China. Singapore’s occupancy rates achieved a historical high of 96.4% in 1H2022, up from 94.1% in 1H2021. Econ’s 44-bed facility in Chongqing, China successfully commenced its operations in May 2021, with an average occupancy of 14 beds in 1H2022. 

(-) 1H2022 operating margins were impacted.  Operating margins came in weaker than expected, at 11% in 1H2022 versus 16-17% in 1H2021/2H2021. This was contributed by: (i) a decline in occupancy rates of Malaysia nursing homes from 75.5% in 1H2021 to 53.8% in 1H2022, driven by declines in the Pudu nursing home, (ii) losses in nursing homes in Pudu and Chongqing, (iii) rises in staff costs and consumables associated with the ramp-up of new nursing homes, and (iv) a decrease in ancillary fees due to cessation of management fees charged to Econ’s related corporation, slightly offset by an increase in Traditional Chinese Medicine (“TCM”) revenue. 

Operational Summary1H20212H20211H2022YoYQoQ
Total Beds Capacity855855855  
Occupied Beds8058128242.4%1.5%
Occupancy Rate (%), out of total bed capacity94.1%95.0%96.4%  
Total Beds Capacity38352152136.0%0%
Occupied Beds289305280-3.1%-8.0%
Occupancy Rate (%), out of total bed capacity75.5%67.4%53.8%  
Total Beds Capacity0044  
Occupied Beds0014  
Occupancy Rate (%), out of total bed capacity0.0%0.0%31.8%  
Total Beds Capacity12381376142014.7%3.2%
Occupied Beds1094111711192.3%0.2%
Occupancy Rate (%), out of total bed capacity88.3%81.2%78.8%  
Source: Company, DBS Bank

(+) Expansion plans remain intact. Expansion plans are on track for (i) 236-bed Henderson BOL, commencement by June 2022 (FY23F), (ii) 280-bed facility in Changshou, China, by 2H2022 (FY23F) and lastly, 732-bed Henderson BOL by 2025 (FY26F). By FY23F, total bed capacity is expected to increase to 1,747 beds, up 23% from 1,420 beds in FY22F, which should support future earnings growth. 

(+) Firm FY23F earnings uplift with meaningful contributions from Henderson BOL. Management expects robust demand for Henderson BOL, with the facility expected to reach optimal occupancy rates and/or close to full occupancy within a year of commencement. With Econ’s strong track record in the Singapore market, we are confident that Henderson BOL will help lift earnings firmly in FY23F to above FY21A levels.

Revised earnings estimate for FY22F, with longer-term estimates largely unchanged. We reduced our FY22F net profit forecasts by 39% (net profit pre-extraordinaries by -28%), on the back of weaker operations in Malaysia and one-off costs. We retain our earlier estimates for FY23F onwards, which translates into a net profit CAGR of 13% over FY21-FY24F and 15% over FY21-FY26F as contributions from Econ’s expansion plans kick in.

Interim dividend of 0.22 SGD cents per share recommended, translating into a dividend payout ratio of 35% in 1H2022.

Maintain BUY with TP of S$0.40