8 Comments

Dear Piccle, Dear friends of LNA Sante,

yesterday the numbers for 2023 came out and the outlook for 2024.

There is volume growth. The problem is not the debt (return on invested capital of 8% versus interest of 4%). 150 million are available for external acquisitions.

The concern that will impact the company's valuation is its net margin, which will be affected by government-regulated prices that do not follow inflation. Is it temporary? or permanent? Should the 4% net margin target be revised?

At the moment I don't think so, but it would be worth asking the question of how we can solve the problem of a state that no longer has the budget to finance healthcare.

What opinion do you have @Piccle/do you have @Community about the new findings?

Kind regards and happy easter

Expand full comment
author

Hi Chris - and thank you for sharing your insights! As a non-Frenchman and the "under the radar" status of LNA, it is not easy to piece together the reasons for the volatile stock price development - hence your input is much appreciated.

As for the debt-load; I also do not see the debt as an issue per say. The issue I have alluded to in the write-up and in other comments is more so directed towards the following: If they acquire real estate assets with debt in a 1% interest rate environment and then tries to sell it in a market with 4% interest a couple of years later, they not only suffer from higher financing costs during the "refurbishment state", but they also suffer from lower RE valuations as they try to get the assets off their books (i.e. a "double-whammy" effect). The higher rates also hit them when they are subsequently leasing the facilities back. That said, I think the market does not fully grasp that they are not - unlike their peers - holding RE on their balance sheet for more than a ~3 years. Hence, the true underlying leverage of the company is much lower than what shows up on headline figures.

As for the pricing; the government's impact on homecare pricing is something I am well aware of. As per my recollection there is a cap on how much prices for homecare services are allowed to increase every year (~3%) and with inflation running hot, it will take some time before said effects (i.e. rising labor costs) can be offset. In my view - without making it a macro-driven bet - I believe these headwinds are "short term". After all, if they turn out to be permanent (i.e. inflation at +3% persistently), then margins would be squeezed to the point where no homecare provider would have a desire to continue operations - and that is not in the best interest of the government.

I try to look at it from the perspective of a preference/constraint framework. In an ideal world, the French government would have budget/capacity to service the overhang of the ageing population by themselves - that is a preference. The budget - a constraint to this preference - keeps them from doing so, and thus they allow private players to compete. Yet, they must compete under a set of rules that ensures the "security" of the people (i.e. pricing caps) - a preference. At the same time, though, they (the government) have to make sure not to erode all of the upside for private players, otherwise they will bankrupt/wind down operations - a constraint. Hence, with the current trajectory, the government *must* amend the aforementioned "rules" to ensure adequate capacity to service their ageing population.

On the 150m earmarked for M&A, I am a bit conflicted. On the one hand, the current industry turbulence likely provides attractive opportunities (as elaborated in my write-up). Hence, they are executing on a plan which makes sense from a strategic standpoint; exploiting the weakness to strengthen their position. On the other hand, I wonder why they are not repurchasing shares. After all, they repurchased shares at high pace when shares traded 75% higher then the current level - and there comes a point where the incremental IRR of repurchasing shares exceeds the potential upside from M&A. Just sharing some of my thoughts.

Hope that makes sense - happy to hear your comments.

Happy easter to you too, sir!

Piccle

Expand full comment

Quite a rant in the Q1 report... not sure if that is a sensible negotiating tactic

Expand full comment

Thank you for this idea. What do you think about 1H results and the insufficient contribution from the State?

Expand full comment
author

I believe it was ok. Topline up 6.7%, yet, slight margin contraction. Guidance unchanged. One quarter is a blip, so let’s see how this evolves. Thesis still intact.

I think the negative sentiment on the back of the report is due to rising interest rates given the RE exposure largely is debt funded. Interest costs up 23.6% yoy. I covered this risk in the write-up. Personally, I have added to my position.

Expand full comment

nice review, have a look at bastide le confort. I don't know LNA sante much because I assumed it was capex heavy. so how does the capex light model work, did they really sell all the real estate or they still have some

Expand full comment
author

Thanks! Will take a look at Le Confort.

They will always have RE exposure so long as they are expanding so to say. The PP&E is basically an integrated *but transitory* element of the business model. A new facility (RE) is bought, refurbed, sold to RE investors. Hence there is some risk associated with the pricing of such buildings during the holding period as well as some interest rate risk as these facilities are primarily financed with debt.

Hope it makes sense, otherwise let me know!

Expand full comment