Still under a cloud of uncertainty
(+) FY22A revenue largely aligned with expectations. FY22A revenue increased to S$38.9m (up 3% y-o-y), and formed c. 97% of our estimate.
(+) Occupancy rates remain robust. On an aggregate basis, occupancy rate remained robust at 84.2% in FY22A, up from 81.2% in FY21A (see next page). Occupancy rate in Singapore, Econ’s key market, reached a historical high at 96.3% in FY22A, up from 95.0% in FY21A. Separately, occupancy rate in Malaysia came in at 57.4%, down from 58.5% in FY21A. We note that Econ had exited its 189-bed nursing home in Pudu, Malaysia, bringing its total bed capacity in Malaysia down to 332 from 521. Lastly, Econ opened its 44-bed nursing home in Chongqing, which had an average occupancy rate of 52.3%.
(+) Expansion plans are on-track. Econ’s 236-bed nursing home in Henderson had a soft launch in April 2022, with 40 residents to date. Separately, Econ’s 280-bed nursing home in Changshou, Chongqing and 732-bed nursing home in Jurong are on schedule for opening in 2HCY22 and 2025 respectively.
(+) Healthy financial position. Econ Healthcare’s financial position remains healthy with cash and cash equivalents of S$26.1m in FY22A, up from S$16.1m a year ago.
(-) Watch for costs and margins. Staff costs (as a % of revenue), the largest expense for Econ, increased to c. 50% in FY22A (versus c. 45%/49% in FY20A/FY21A), above management’s guidance of 46%-49%. The increase in salary cost was due to (i) salary enhancements, (ii) COVID19-related expenses, (iii) overtime payment, (iv) temporary contract service fees in Singapore and (v) ramp up of new nursing homes. Although management has shared that the government may continue to provide subsidy assistance in relation to rising staff costs, we note that recent measures released in the Singapore Budget 2022 could lead to future increases in qualifying income for S-passes and progressive wages (for administrative assistants) (effective 1 Sept 2022). This could lead to upward pressure on staff costs from FY23F onwards.
Additionally, supplies and consumables (as % of revenue) also increased to 15% in FY22A, up from 14.5% in FY21A driven by higher resident count and COVID19-related expenses. As a result of rising costs, PATMI margins (excl exceptional items) declined in FY22A to 9.2%, down from 10.3% in FY21A.
Maintain HOLD with lower TP of S$0.26. We trimmed our FY23/24F earnings estimates by 15/22% by assuming (i) higher staff costs-to revenue ratio of 49-50% (up from our previous assumption of 47%) and (ii) higher supplies and consumables costs-to-revenue of 14% (up from 13.5%). Our TP is based on 16.5x FY23F PE, which represents a c. 25% discount to its global peers (see next page).