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On today’s TSX Breakouts report, there are 20 stocks on the positive breakouts list (stocks with positive price momentum), and seven stocks are on the negative breakouts list (stocks with negative price momentum).

Discussed today is a dividend stock whose share price has declined 7 per cent in the past five weeks and is just 3 per cent away from appearing on the negative breakouts list. This stock is best suited for consideration by patient investors seeking steady income.

The stock has a current yield of 5.8 per cent and with a payout ratio of 77 per cent in the first half of 2019. Looking out to 2020, the company’s profitability is anticipated to ramp up due to two key drivers. The security highlighted below is Extendicare Inc. (EXE-T).

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A brief outline is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.

The company

As at June 30, Markham, Ont.-based Extendicare operated or served 121 LTC (long-term care) centres and retirement homes in four provinces, predominately in Ontario and Alberta. The company’s core business segments are LTC (representing approximately 55 per cent of total NOI, net operating income, in the second quarter), home health care under the ParaMed brand (representing roughly 27 per cent of total NOI), retirement living (representing around 8 per cent of total NOI), with the balance of NOI derived from other operations (including contract and consulting services and group purchasing).

After the market closed on Aug. 14, the company reported its second-quarter financial results. AFFO (adjusted funds from operations) per share came in at 17 cents, falling short of the consensus estimate of 14 cents per share. Yet despite the earnings miss, the share price advanced 0.6 per cent the following day as investors appear to be cautiously optimistic that the company’s profitability will improve - in time – due to two key drivers: ParaMed’s technology integration and the upcoming exit of ParaMed’s B.C. home health care operations.

On the earnings call, the chief executive officer Michael Guerriere elaborated on the company’s progress with its technology integration, “We're in the process of strengthening our ParaMed business by moving to a new cloud-based system that will better enable the company to meet increasing demand for home health services. When the ParaMed transformation is complete, Extendicare will have an enhanced ability to optimize scheduling, automate work processes, reduce turnover and provide better support for Extendicare's valued staff. We are already seeing the benefits of this effort with a 1.4 per cent increase in the average daily hours of service provided in Q2 [second quarter] compared to the first quarter of 2019, along with increased NOI margins.” Further benefits are anticipated to gradually be seen in 2020.

Mr. Guerriere stated, “We’re also seeing that it takes a certain amount of time for an office to get used to the new system. Probably takes about six months for an office to get used to a new system and start getting the full benefit of the automation that’s available there… probably better to think about it as a six-month lag from when the system comes into use to when we start seeing some solid and reliable performance improvement.” The chief financial officer David Bacon added, “I still think you’re going to see the margin upticks starting early part of next year, coming out of Q4 [fourth quarter] into Q1 [first quarter]. I would hope by the middle of next year, we’ll start to see some steady improvement in margins through 2020.”

Mr. Guerriere also provided an update on its upcoming exit from the BC home health care market that was announced in March, “Final dates for the transfer of the operations to the B.C. Health Authorities are being finalized, but we expect the process to complete no later than the first quarter of 2020.” In 2018, ParaMed’s operations in B.C. represented less than 1 per cent of its NOI. In the second quarter, ParaMed’s B.C. operations reported a NOI loss of $300,000.

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While the company’s retirement living operations remains a relatively small business segment for the company, management is committed to steadily gaining exposure in this market. In the fourth-quarter of 2019, a 124-suite retirement home located in Barrie, Ont., is expected to be completed. The CEO noted on the earnings call, “We have had strong pre-lease activity with deposits on hand for 71 per cent of the suites. As a result of this response, we are targeting stabilized occupancy of 92 per cent within 24 months of opening, ahead of our initial expectations. Further expansion plans are in the making to almost double the size of our Port Hope retirement community, which we hope to break ground on later this year. We will continue to assess other potential growth opportunities in a disciplined fashion.”

Dividend policy

The company pays its shareholders a monthly dividend of 4 cents per share, or 48 cents per share on a yearly basis. This equates to an attractive current annualized yield of 5.8 per cent. Management has maintained the dividend at this level since 2013.

The dividend appears sustainable. The AFFO payout ratio for the first half of 2019 stood at 77 per cent, and in 2018, the payout ratio was 73 per cent.

Analysts’ recommendations

Since the company released its second-quarter financial results, six analysts have issued research reports on the company, of which three analysts had buy recommendations and three analysts had neutral, or sector perform, calls.

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The six firms providing recent research coverage on this small cap stock with a market capitalization of $735-million are as follows in alphabetical order: CIBC WorldMarkets, Echelon Wealth Partners, Laurentian Bank Securities, National Bank Financial, RBC Dominion Securities and TD Securities.

Revised recommendations

In Aug., two analysts upgraded their recommendations and four analysts revised their target prices higher.

Doug Loe, an analyst at Echelon Wealth Partners, upgraded the stock to a “buy” recommendation from a “hold” and increased his target price to $9 from $8.25. Chris Couprie, an analyst at CIBC World Markets, also upgraded the stock to an “outperformer” recommendation from a “neutral” call and hiked his target price by $1 to $9.50. RBC’s Pammi Bir raised his target price to $9 from $8.50. TD Securities’ analyst Jonathan Kelcher lifted his target price by 50 cents to $9.

Financial forecasts

Looking forward, analysts are forecasting double-digit earnings growth for the company. The consensus AFFO per share estimate is 62 cents for 2019 and anticipated to rise nearly 13 per cent to 70 cents in 2020.

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Earnings revisions have edged slightly higher in recent months. For instance, three months ago, the consensus AFFO per unit estimates were 60 cents for 2019 and 69 cents for 2020.

Valuation

According to Bloomberg, the stock is trading at a price-to-AFFO multiple of times of 11.8 times the 2020 consensus estimate.

The average one-year target price is $9.17, suggesting the share price has over 10 per cent upside potential over the next 12 months and a potential total return (including the dividend yield) of over 16 per cent. Target prices range from a low of $8.50 (from National Bank’s Tal Woolley) to a high of $11 (from Laurentian Bank’s Yashwant Sankpal). Individual target prices are as follows in numerical order: $8.50, three at $9, $9.50 and $10.

Insider transaction activities

Most recently, between June 28 and July 10, director Samir Manji invested roughly $880,000 in shares of the company. He purchased a total of 105,100 shares at an average price per share of approximately $8.37 for an account in which he has control or direction over. Mr. Manji is the former founder and chief executive officer of Amica Mature Lifestyles Inc., which was listed on the Toronto Stock Exchange until it was purchased by Ontario Teachers’ Pension Plan. Mr. Manji is the founder and chief executive officer of Sandpiper Group, which has a significant ownership position in Extendicare and aims to unlock value for its shareholders.

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Prior to that, on May 17, chief financial officer David Bacon invested over $193,000 in the company with the purchase of 23,875 shares at an average price per share of roughly $8.09 for two accounts (17,500 shares in his personal trading account and 6,375 shares in his RRSP).

Chart watch

Year-to-date, this is the best performing stock in the S&P/TSX composite health care sector index with a price return (not including dividends) of just over 30 per cent. However, since the beginning of August, the share price has declined 7 per cent and is less than 3 per cent away from appearing on the negative breakouts list.

Looking at key resistance and support levels, the share price is approaching strong technical support around $8. Failing that, the next level of support is around $7.50, close to its 200-day moving average (at $7.54). Should the share price recover, there is major overhead resistance between $9 and $9.25.

The three-month historical daily average trading volume is approximately 290,000 shares.

The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company’s dividend policy, analysts’ recommendations, financial forecasts, and provides a brief technical analysis for a security to provide readers with more information.

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If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.

Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.

A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.

Positive BreakoutsSept. 6 close
BNS-TBank of Nova Scotia $72.08
BCE-TBCE Inc $63.54
BNP-TBonavista Energy Corp $0.59
BYD-UN-TBoyd Group Income Fund $185.01
BAM-A-TBrookfield Asset Management Inc $70.55
CU-TCanadian Utilities Ltd $38.85
CHE-UN-TChemtrade Logistics Income Fund $11.22
CLR-TClearwater Seafoods Inc $5.97
CPG-TCrescent Point Energy Corp $4.96
CRT-UN-TCT Real Estate Investment Trust $14.81
EFN-TElement Fleet Management Corp. $10.77
WN-TGeorge Weston Ltd $111.21
IAG-TiA Financial Corp. $57.35
KML-TKinder Morgan Canada Ltd. $14.69
MRU-TMetro Inc $57.89
VII-TSeven Generations Energy Ltd $8.01
SLF-TSun Life Financial Inc $56.25
X-TTMX Group Ltd $119.26
TA-TTransAlta Corp $8.84
ZYME-TZymeworks Inc. $38.20
Negative Breakouts
AW-UN-TA&W Revenue Royalties Income Fund $39.00
CFX-TCanfor Pulp Products Inc $8.70
CCL-B-TCCL Industries Inc $56.70
XAU-TGoldMoney Inc. $2.01
BCI-TNew Look Vision Group Inc $31.76
SMF-TSEMAFO Inc $4.72
SIA-TSienna Senior Living Inc $18.60

Source: Bloomberg

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