Eureka Stakes Out Position In Seniors’ Living

This story features EUREKA GROUP HOLDINGS LIMITED, and other companies. For more info SHARE ANALYSIS: EGH

-Acquisitive growth strategy
-Quality revenue profile
-Maximising service options

By Eva Brocklehurst

Eureka Group ((EGH)) plans to become one of Australia's major owner/operators of independent senior accommodation. The company operates an acquisitive growth model with a strategy of acquiring underperforming retirement village assets that are well known to the company through its management division. Eureka's strategy has shifted to being an owner-operator rather than a pure manager of villages.

Canaccord Genuity initiates coverage on the stock with a Buy rating and 47c target. Financing has been secured at a loan-to-value ratio of 70% when acquiring villages and, following improvements in operating metrics, Eureka now generates equity rates of return of over 30% on owned villages. A large proportion of formerly underperforming property management agreements have been rationalised. Canaccord Genuity believes management now has the means to acquire villages from its property management portfolio at favourable rates of return. The broker also likes the stability and longevity of earnings in village ownership versus property management.

Earnings growth forecasts are based on the acquisition of four villages per year at current multiples. Moreover, Canaccord Genuity considers there is potential upside to this number as the growth profile is accelerated. For investors that can tolerate the volatility that comes with micro-cap consolidation the broker believes Eureka is worth considering. At current prices the broker estimates the stock is trading on FY16 and FY17 price/earnings ratios of 18.7 and 13.3 respectively.

Canaccord Genuity remains attracted to Eureka's growth and revenue profile as well as the quality and long-term annuity stream. Around 99% of revenue is sourced indirectly from the federal government through aged pension and rental assistance and there is a structural tailwind given the ageing population. The company intends to maximise catering opportunities across newly-owned villages, improve operations through increased occupancy and opting-in to services, and increase revenue by offering extra services such as physiotherapy.

The company's strategy is to provide affordable rental accommodation primarily in rural or outer suburban regions where there is a high concentration of retirees in the middle/low income bracket, thus providing accommodation to those who are unable to obtain the upfront capital required to purchase a retirement home. The company's assets do not fall under the Australia Aged Care Act, which means Eureka can be a residential estate owner and manager through a weekly rent roll, a major differentiator versus other aged care operators such as Regis Healthcare ((REG)), Japara Healthcare ((JHC)) and Summerset.

Eureka has a potential target revenue opportunity of $200m but also requires $320m in equity capital to completely consolidate its market segment, in the broker's calculations. Senior management and the board currently retain 19.6% of the share register. The company is not expected to pay cash tax until after FY20 based on the broker's current earnings forecasts.

Head office is on the Gold Coast and Eureka currently owns and manages seven villages with the management rights to a further 14 in Queensland, NSW and South Australia. Canaccord Genuity observes the company has the infrastructure and systems in place to manage around 3,500 units, approximately double the current size. Property management is not as scalable or lucrative as village ownership but, by managing the village prior to acquisition, Eureka ensures it knows the asset and has a good understanding of the potential upside. The broker emphasises the company is not a developer, nor does it intend to undertake a greenfield investment strategy.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms