Estia Health share price tumbles after being cut from the ASX 200

The Estia Health Ltd (ASX: EHE) share price is tumbling lower today as the ASX responds to bleak trading in the US overnight.

At the time of writing, Estia shares are down 8.39% while the S&P/ASX 200 Index (ASX: XJO) sits 3.10% lower.

Estia Health shares have been included in the benchmark index since March 2015. However, this is set to soon come to an end.

The S&P Dow Jones Indices announced the June 2020 quarterly rebalance of the S&P/ASX Indices this morning. And with a current market capitalisation of just $370 million, it comes as no surprise that Estia didn’t make the cut.

As a result, Estia will cease being part of the benchmark index from the market open on 22 June 2020.

What’s going on with the Estia Health share price?

Estia Health shares were sold-off alongside the rest of the market earlier this year, falling to a 52-week low of 90 cents at the bottom of the March bear market. 

Since then, despite positive investor sentiment driving the market higher, Estia’s rebound has been relatively subdued. Accordingly, the Estia share price is still down more than 40% for the year.

The company’s most recent update was delivered in late May. In the release, Estia shed some light on trading conditions and its financial position.

At the time of the announcement, the aged care provider assured investors that none of its residents had tested positive for COVID-19. However, the company had 3 confirmed cases within its workforce of around 7,500 staff which occurred in March and April.

In terms of operations, occupancy in mature homes fell during the early stages of lockdown restrictions from 93.8% on 17 March to 91.7% on 26 April.

The company attributed the reduction to a number of factors, including the cancellation of travel and elective surgeries, and visitor restrictions.

Nonetheless, Estia Health has been buoyed by government support. At the beginning of May, the government announced a one-off payment to residential aged care providers of either $900 or $1,350 for each resident, depending on the location. As a result, Estia expects the payments to contribute up to $5.2 million of additional revenue in FY20.

Financial position

Looking to the balance sheet, net bank debt at 22 May 2020 stood at $108.5 million. This was an increase of $11.9 million since 31 December 2020. Estia noted that it expects to remain in full compliance with its banking covenants at 30 June 2020 and hasn’t sought covenant relief.

In terms of expenses, the company flagged an increase in staff costs and costs associated with supplying personal protective equipment and other medical supplies. However, as part of its approach to capital management in response to COVID-19, Estia made the move to temporarily defer several refurbishment and development projects.

Prior to this announcement in late May, Estia provided its first COVID-19 update in mid-March and delivered its first-half FY20 results in late-February.

While Estia is exposed to ageing population tailwinds, I believe there are better options out there for income and growth.

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Motley Fool contributor Cathryn Goh has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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