High Acuity Aged Care Demand Will Support Long Term Earnings Potential

Catalysts

About Radius Residential Care

Radius Residential Care operates aged care and related health services across New Zealand, focusing on high acuity residential care and complementary community support.

What are the underlying business or industry changes driving this perspective?

• Rising demand for high acuity aged care, supported by an ageing population and Radius Residential Care's focus on complex residents, should sustain high occupancy levels and lift care revenue and earnings over time.
• Government and health system preference to support people in their own homes, combined with Radius Residential Care's unique position as an approved ACC high dependency provider, is likely to accelerate growth in community and in home care services. This may drive diversified revenue and help stabilise cash flows.
• Capital light expansion through third party owned care facilities and brownfield villa developments enables scale without overleveraging the balance sheet. This supports ongoing revenue growth while protecting net margins and return on equity.
• Further optimisation from the RadPro operating model, including greater use of data and AI to standardise best practice across homes, is expected to enhance staff productivity and care mix. This supports higher EBITDA per bed and stronger net margins.
• A pipeline of large care home developments and targeted acquisitions, illustrated by the rapid integration and refurbishment of St Allisa, should add materially to capacity and operating leverage. This may boost total earnings and available funds from operations as new sites reach mature occupancy and margin levels.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Radius Residential Care's revenue will grow by 7.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.9% today to 9.1% in 3 years time.
• Analysts expect earnings to reach NZ$21.5 million (and earnings per share of NZ$0.07) by about December 2028, up from NZ$11.4 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 8.4x on those 2028 earnings, down from 9.9x today. This future PE is lower than the current PE for the NZ Healthcare industry at 17.2x.
• Analysts expect the number of shares outstanding to decline by 0.48% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.32%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The rapid growth strategy built around multiple greenfield and brownfield projects, plus a pipeline of third party developed facilities, could be delayed by consenting, construction bottlenecks or funding partners changing priorities. This would slow the expected lift in capacity and reduce future revenue and operating leverage driven earnings.
• Reliance on government policy and ACC and Health New Zealand contracts for high dependency and in home care means any shift in funding models, reimbursement rates or eligibility criteria could erode the economics of community services and high acuity care, pressuring care revenue growth and compressing net margins.
• The capital light model depends on external landlords and investors to own land and buildings. If interest rates remain elevated or asset owners become more risk averse, Radius Residential Care may have to accept higher lease costs or fewer projects, which would weigh on long term profitability and constrain earnings growth.
• Sustaining very high occupancy levels near the 95% to 98% target while maintaining industry leading care quality and low staff turnover could become harder as the business scales. Any deterioration in audit results, resident outcomes or staff retention would likely force higher staffing and compliance costs, reducing net margins and EBITDA per bed.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of NZ$0.51 for Radius Residential Care based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be NZ$235.6 million, earnings will come to NZ$21.5 million, and it would be trading on a PE ratio of 8.4x, assuming you use a discount rate of 8.3%.
  
• Given the current share price of NZ$0.4, the analyst price target of NZ$0.51 is 21.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.