Higher staff costs, loss of investor trust plague Econ Healthcare: DBS

“There is lack of information on remedial solutions on Econ’s investment mandate, which could cloud investors' perception.”

Watch for headwinds Econ Healthcare (Asia) Limited, as staff costs weigh on revenue and net profit in 1HFY2023 ended September, write DBS Group Research analysts Andy Sim and Paul Yong.

The nursing home provider’s 1HFY2023 revenue and net profit fell short due to a slower-than-expected ramp-up in occupancy at Econ’s Singapore operations and higher staff costs at some 54%, note Sim and Yong in a Nov 10 note.

Staff costs are up from 49% at 1HFY2022 and 50% at 2HFY2022. “Going forward, we have adjusted our occupancy rates and staff/operational costs’ assumptions and trimmed our FY2023/FY2024 earnings downwards by 18%/12% respectively,” write Sim and Yong.

The DBS analysts are maintaining “hold” with a lower target price of 22 cents, down from 26 cents previously. The new target price represents an 8% upside from the traded price of 20 cents on Nov 7.

Notably, Sim and Yong point to a “lack of remedial solutions” around Econ’s investment mandate. “In January 2022, Econ invested some $4.0 million of its idle working capital into Crosstec Group Holdings shares, which resulted in a $3.4 million loss on disposal, representing some 10% of shareholders’ equity. There is lack of information on possible remedial solutions on Econ’s investment mandate, which could continue to cloud investors’ perception of Econ.”

Occupancy below expectations

Since the start of Econ’s Henderson nursing home facility in Singapore in April, Econ added 28 beds in the span of five months, which came below the previous guideline of 30 beds per month upon commencement.

However, occupancy rates came at 78% in 1HFY2023, compared to 81% in FY2021 and 84% in FY2022, which is below DBS’s expectations. “In our view, Singapore’s slower-than-expected ramp-up in occupancy could be attributed to the ongoing concerns around the Covid-19 pandemic.”

That said, Econ’s expansion plans are on track, write Sim and Yong. Econ’s 280-bed nursing home in Changshou, China; and 732-bed nursing home in Jurong are on schedule for opening in 2H2022 and 2025, respectively.

“In our view, we could see staff costs as a percentage of revenue come down slightly from its 1HFY2023 peak of 54% as Econ ramps up its Henderson and Chongqing facilities, albeit likely to remain above 50% amid continued wage pressures.”

Further, although management has shared that the government may continue to provide subsidies’ assistance in relation to rising staff costs, Sim and Yong note that recent measures released in the Singapore Budget 2022 could lead to future increases in qualifying income for S-passes and progressive wages, effective September. This could lead to upward pressure on staff costs from FY2023F onwards, add the analysts.

Econ’s financial position remains “healthy”, write Sim and Yong, with a cash balance of $25.2 million as of Sept 30. The group has declared an interim dividend per share of 0.23 cents, steady from 1HFY2022 of 0.22 cents.

As at 1.27pm, shares in Econ are trading flat at 20 cents.

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