06-Nov-2020: Taylor Collison: Eureka Group (EGH): Robust Trading Update & Acquisitive Growth Continues
Analyst: CAMPBELL RAWSON, crawson@taylorcollison.com.au, +61 415 146 725, www.taylorcollison.com.au
Our View
EGH’s steady growth profile remains attractive with an acquisitive strategy gradually ramping up to complement organic growth. Highly experienced property executive, Greg Paramor, has joined the board which bodes well for a prolonged and disciplined acquisition approach. With 90% of rental income underpinned by government funding, we expect a consistent earnings profile from EGH. With the addition of recent acquisitions, a full period of cost reductions, the expansion at Wynnum village and strong performance from Tasmanian assets, we forecast underlying EPS growth of 33% and 19% for FY21 and FY22 respectively. We remain comfortable with EGH’s capacity to service debt and anticipate further acquisitions in FY21 and/or FY22. Trading in line with our FY21E NTA and on 11.9x our FY21E EPS, we believe EGH is undervalued given the current growth profile and defensive nature of earnings.
Key Points
- Acquisition of 123 units across two villages in Northern QLD for $13m
- Purchased from the same owner, EGH has acquired a 70-unit village in Cairns and a 53-unit village in Hervey Bay, both of which are ~20 years old and have benfitted from a consistent refurbishment scheme. Management are delivering on the strategy of increasing scale and improving the portfolio profile with assets in areas exhibiting attractive demographics. With little supply in the area, the Cairns village complements EGH’s existing village 20km away and Hervey Bay boasts a strong retirement theme with a median age of 48 (37 across the rest of Aus). 36 of the 53 units at Hervey Bay sit under a legacy DMF structure and whilst approval has been received to convert to rental units, we expect this may take up to four years. Despite this, the village is cashflow positive with earnings to improve gradually. In line with previous acquisitions, we estimate a 10% ROI however with the gradual transition of DMF units, we have forecast an initial full year EBITDA contribution of $800k with linear increases through to $1.3m from FY22. We note $2.5m of the $13m payment is deferred for two years to reflect the slower ramp up to the expected earnings profile.
- Scope for further acquisitive growth improves as debt facility increases
- EGH’s debt facility has increased from $60m to $77.5m and following the acquisitions, we forecast FY21 gearing (debt/tangible assets) of 41%, well below the 50% covenant. With headroom of ~$16m and corporate travel slowly resuming, management are more easily able to complete due diligence and we anticipate further acquisitions to follow in the short term. See pg 2 for detailed breakdown of debt covenants.
- FY21 underlying EBITDA guidance of $9.8-$10.2m
- We have upgraded our forecast from $9.8m to $10.1m to reflect the impact of the Hervey Bay and Cairns acquisitions. Guidance, nor our underlying EBITDA forecast, account for the on-going sale of legacy assets at Terranora. With seven units sold YTD, the process remains on track to meet our forecast of 20 units sold for ~$4.8m revenue and ~$1m profit. This strategy is consistent with managements desire of recycling capital to core assets and contributes to the funding of the Wynnum expansion and the above acquisitions. With less debt funding required, NTA increases from 36c to 38cps.
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