Description

“Throwing out the baby with the bathwater” whilst a cliché, aptly describes the current share price of LNA Santé following a scandal at their much larger peer Orpea. Orpea’s wrongdoings and alleged wrongdoings were exposed in the book Les Fossoyeurs (The Gravediggers). To make matters worse, interest rates and inflation increased, which lowered property values, increased debt servicing costs and damaged margins. Orpea was overlevered and likely had aggressive accounting. The share price fell 93% in 2022 and the company will undertake a complete financial restructuring. Similarly, Korian, another listed peer with a similar model to Orpea fell 64% in 2022. We believe LNA’s situation to be completely different and thus its share price reaction irrational.

Note this is illquid and for small funds or PA.

LNA Santé happens to be in the same sector and whilst they may face stricter regulation and some higher costs, we do not believe this justifies the 41% fall in the share price during 2022. The company is family run and we believe to be of significantly higher quality than their larger peers, as evidenced by their occupancy rate recovery post-Covid and post-scandal (versus Orpea’s and Korian’s occupancy rates which have not recovered to pre-Covid levels). Our discussions with experts also indicates the company is held in high regard and will more than likely benefit from the Orpea crisis (They are even mentioned positively in the book). The company does not face the same impact from higher interest rates and property price declines that their larger peers are suffering.

While not our base case, M&A could also be a theme as Orpea and Korian will likely be distressed sellers of assets and there have been other bankruptcies (i.e. Covivo in Germany) in the sector post-COVID.

We think management wants to create value for shareholders as both the management team and the founding family are large holders. Furthermore, the family, management and several long-term investors increased their stake at €52.50 by acquiring a stake sold by a private equity fund in February of 2022. At the same time, second tier management (c. 700 employees) along with the aforementioned parties participated in a capital raise at €52.50 per share in February 2022 raising €50 million and are thus sitting significantly underwater. Even if the family might not care about the share price (which we have no evidence that they don't), they will likely be pressured by their own employees and the long-term holders who increased their stake to create shareholder value.

Demographic trends in France point to increasing demand for nursing homes while the government has limited ability (or desire) to fund the creation of new beds. Depending on the evolution of demand, this could create substantial opportunities for private nursing home operators, who already account for 24% (1) of the market.

Trading at a free cash flow yield of 12% on 2024 estimates with a strong pipeline of additional beds and a demographic tailwind (ageing population), we think the market will slowly recognize the value once the Orpea restructuring is past and a few quarters of continued earnings resilience are achieved. We see the potential for more than 100% upside.


Orpea Scandal

In January 2022, Victor Castanet, an independent journalist, published the book Les Fossoyeurs (The Gravediggers), in which he made multiple allegations about the “Orpea System”, regarding elder abuse, mistreated employees, accounting acrobatics, and squandered public money. Reports of the upcoming publication caused a violent share price reaction (-16%) on the first day, obliging Orpea to request the suspension of its shares. After publication, the share took a further beating and the termination of the CEO and the board soon followed.

Allegations in the book point to bribery of officials, fraudelent rebates from suppliers, fraudulent expensing of staff and tax evasion.

- Straight after the publications, the French government opened an administrative investigation into the Orpea group. The six-week investigation confirmed only parts of the numerous accusations including:
- Sanitary dysfunctions: Weakness in the support of residents in the nursing homes and nutritional insufficiencies.
- Fraudulent Practices: Confirmed three fraudulent practices but no official number was disclosed.
- €20m unused funds: The company had spent all state contributions with the surplus inflating the group’s profits.
- €51m public money misappropriation: Using public money to cover some hospitality expenses between 2017 and 2020.
- €18m year-end rebates: Having benefited from year-end rebates from its medical suppliers between 2017 and 2020.

In total, Orpea is suspected of having unfairly benefited from €88 million in state subsidies for the period 2017-20 (versus €400 million per year in operating profits) at least based on the findings at the time of enquiry.

Subsequently, Mediapart and Investigate Europe reported the existence of a parallel structure to Orpea, based in Luxembourg, which they say accumulated €92 million in assets and carried out dubious financial operations. The article describes an organised system of tax evasion through suspicious financial practices, conflicts of interest and hidden commission, involving the former CFO, Orpea Italy’s CEO and the owner of Lipany (2).

Orpea’s new management initiated an in-depth review of its assets. The announced “ORPEA Changes with You and for You” refoundation plan, included changes in its approach to care and support, increased attention paid to employees, and restated balance sheet numbers. As announced in the press release in October 2022, independent property evaluators and internal audit teams re-assessed tangible and intangible values based on the increase of risk-free rate to 2.5% and the increase of capitalisation rate to 5.5% (versus 5.3% in 2021) under the new business plan. The review covered 90% of the total assets (excluding cash) appearing on the balance sheet as of June 2022 and resulted in €5.0-5.4 billion of impairments by yearend (December 2022) with a negative impact on equity of €600 million due to deferred tax liabilities reversal. The review carried out on 83% of the real estate portfolio resulted a reduced real estate value to €6.0-6.1 billion versus €8.4 billion in December 2021 (3). The portion of the real estate portfolio not valued by independent appraisers consists mainly of assets under construction, assets held in co-ownership and certain assets with specific characteristics (small size, sites undergoing restructuring, etc.)

As indicated in the 1st February 2023 press release, in order to support the Refoundation Plan and achieve a sustainable financial structure, the group is aiming for an equity conversion of unsecured debt amounting to €3.8 billion, through a capital increase with maintenance of the preferential subscription rights of existing shareholders, guaranteed by all the unsecured financial creditors who subscribe. After which there will be an equity injection of €1.55 billion, via two capital increases that would be subscribed by the Groupement (4) for €1,355 million and a backstop for the balance up to €195 million, provided by the SteerCo (5). The plan also includes covenant adjustments, debt maturity extensions and necessary modifications to existing debt to facilitate the implementation of the plan. As of December 2022, the company had €9.7 billion gross debt. The financial restructuring plan proposed by the group is expected to significantly reduce its net leverage ratio, from 25x in 2022E to 6.5x by 2025E.

In the second quarter 2022 results, Orpea reported an EBITDAR margin decline from 24.9% to 18.6% mainly driven by non-recurring revenues (3.8% impact), including lower Covid compensation not offset by higher occupancy rate and some provision reversals. Inflationary pressure was responsible for the remaining part as food cost increased by 15% and energy cost by 50% (3% sales versus <2% in the second quarter 2021). Orpea wasn’t able to offset pressure with tariff increases. Management stated that in the short-term inflation, mainly energy, food, and wages, along with some one-off costs related to the scandal and the new measures taken by the group will put pressure on margins. However, a key objective of the transformational plan is to partially restore EBITDAR margins from 17% in FY22 to 20.4% in FY25. It is worth noting that this is a significant step down from the pre-scandal FY21 guidance of over 25%.

As most of the costs are fixed (75%), any progress in occupancy rate has a direct impact on profitability. A 1-2% rise in occupancy rate has an impact of 5-10% on Orpea’s EBIT margin. The Group was experiencing high occupancy rates (97-98%) pre-scandal. In France, the occupancy dropped to 91-92% post scandal announcements (Fourth quarter 2022 occupancy at 82.1%). It will probably take some time for the company to fix that. Hence, the reputational damage is also responsible for the downward revision of margins.

Overall, Orpea’s transformation/restructuring plan will lead to a massive debt for equity swap on top of a dilutive capital raise, which will significantly hit existing shareholders. Subsequent base rate increases could further increase cap rates and further reduce valuations.

Company Background

Le Noble Age (LNA) was established in 1990 with its first nursing home (EHPAD ) in Nantes, France. Five years later, the Company pioneered the development of building facilities dedicated to Alzheimer disease. In 1999, LNA ventured into the health field with the acquisition of its first medical care and rehabilitation facility (SMR(2)) in Mar Vivo. The company expanded geographically in 2003 with the acquisition of facilities in Belgium (and later to Poland in 2022). At the time of the IPO (2006), LNA was operating 17 facilities (16 Nursing Homes and 1 SMR(7)) and had 1,000 employees. Today, LNA is one of the leading care home operators in France with 81 facilities with an authorised base of 9,996 beds (of which 1,048 on transformation and 647 to be installed) and 7,523 employees of which 7069 in France, 346 in Belgium and 108 in Poland.

LNA is a family-run business, founded by Jean-Paul Siret, who was Chairman and CEO from 1992 until 2021 when his son Willy Siret became CEO. Willy Siret joined LNA in 1999 and served various roles including strategy director, operations supervisor, and COO.

The company organizes its key performance indicators (KPIs) in a way that separates the established and operating beds (cruising speed) from non-established (company refers to this as restructuring but we think this is a bit of a misnomer) to help understand margins. Established and operating are the beds of a fully renovated facility that generate profits at the targeted level for the group. Established but not operating are the empty beds of a fully renovated facility that are captured in the occupancy rate calculation. On the other side, the non-established beds refer to the under-transformation beds/rooms of a newly acquired facility that the group is converting to LNA standards and usually require lower fees to bring occupancy to a desirable level. These fee rates for new occupants then increase as existing occupants leave (2-3 years transformation). Based on the September 2022 numbers, 89% of the bed pool (9,335 beds) are established and operating with 1,681 beds under transformation (non-established) stage. Management plans to increase the number of beds through expansion of current facilities. Together, expansion and transformation projects comprise the beds pipeline which targets 10,450 fully established and operating beds by 2027. The target excludes acquisitions of new licences.

2019: 6,519 beds
2020: 7,041 beds
2021: 7,857 beds
2022: 8,300 beds
2023e: 8,450 beds
2024e: 9,000 beds
2025e: 9,300 beds
2026e: 10,050 beds
2027e: 10,450 beds

Nursing Homes

Medical-Social account for 44% of FY21 Group’s sales, with 45 nursing homes in France (40% of sales) and four nursing homes in Belgium (4%) offer accommodation facilities for and catering services to dependant and elderly persons (EHPAD). Accommodation can be provided on a full-time, temporary, or sequential basis. The French and Belgian operations combined have 5,033 beds in operation and 177 beds under transformation (September 2022).

The segment is split between operations in two ranges, both based on the services offered. The Elegance range (historic market position) captures the top-end market while the Comfort range offers a mid-market alternative without compromising the quality of care. In September 2022, Elegance range occupancy rate was 93% versus 90.2% in June 2021, while Comfort range occupancy rate was 96.5% versus 94% respectively.

Medical & Rehabilitation, Psychiatric and Surgery

Medical & Rehabilitation, Psychiatric and Surgery accounts for 38% of the Group’s FY21 sales. Combined the segment has 2,688 beds in operation and 757 beds (September 2022) on transformation with a pipeline of 1,511 beds.

Medical & Rehabilitation: This segment offers medium-term stays and services that cover re-education, rehabilitation, and re-integration services. Most cases (88%) are for fulltime care of the patient for an average length of stay of approximately 35 days with the remainder being partial day-care services. Rehabilitation aims to help the patient recover physically, mentally, or physiologically. Rehabilitation supports the patient to adapt to the limitations of his/her abilities and the development of workaround strategies. Finally, reintegration is about putting in place the essential elements for the return to normal environment after the stabilisation of the patient’s health. The majority of revenues (68%) comes from health agencies and insurance companies.

Psychiatric Clinics/Mental Health Centres: This segment offers psychiatric units for patients with 32% being day-only patients and 68% of cases requiring the full hospitalisation of the patient with an average length of stay of approximately 58 days (6% of patients are hospitalised for more than six months and 3.5% are for more than a year). Hospitalisations can be both freely consented or without consent.

Surgery: This segment focuses on simple day surgeries with hospitalisation for less than 12 hours without overnight accommodation. This segment offers scheduled, less complex surgical procedures such as ophthalmological and dental. Day surgery represents 45% of operations in France (8).


Home Care

This segment (9% of sales) ensures continuous and coordinated medical and paramedical care in the patient’s home by involving hospital doctors, physicians, and other paramedical staff. Home hospitalisation treats patients of all ages suffering from serious acute or chronic health problems. The complexity and frequency of care differentiates this category from the common care-at-home with an intention to avoid or reduce full-time hospitalisation. The rate varies based on the therapy and the duration of the treatment while the tariff covers the full cost. This segment has 580 beds in operation and 100 under transformation (September 2022). While the national average of EHPAD patients cared at home (HAD ) is approximately 8.8%, LNAs’ HADs are positioned well above this figure. For example, the HAD of Haute-Savoie Sud had 30% and the HAD of Orleans had 28%.

Real Estate Development

LNA does not follow the same strategy regarding real estate ownership as Orpea or Korian. The Company simply carries real estate assets on its balance sheet on a transitional basis until completion of redevelopment and subsequently sells them to real estate investors. As they have an in-house development team, this strategy saves development money, allows the Group to transform the facility according to their own standards and offers them a discount on post-exit rent as they do not inflate the real estate values. The real estate development arm is also responsible for facility expansion projects.

Given the licence-restricted market structure, the real estate segment offers one of the only ways, aside from occupancy rate improvement, to grow the business in France. LNA obtains licences through acquisition of small private or state-owned nursing homes which are on average older than 35 years and require upgrades to include en-suite bedrooms, elevators, and other modernisations. Through this lens, the real estate segment indirectly offers value without generating profits in the real estate segment but rather in lower rents and improved facilities for the operating business.

One clear concern given Orpea’s and Korian’s balance sheet issues is the real estate debt. LNA does use significant amounts of debt against its short-term real estate assets. They typically use 80-85% loan to value on our calculations. This may seem high, but they are essentially using debt to fund the refurbishments and quickly sell the assets on (<1 year). The total real estate debt is around €200 million; even if the real estate assets were valued at zero, the group’s leverage would be less than four times. If real estate prices fall 10%, much of the equity might be wiped out but the company could benefit from lower rents as well.

Note Orpea and Korian are more like 3.5-4x at the operating lever and 15x /8x including RE.

Shareholders

Based on September 2022 data, family controls 32%, employees hold 8.3%, managers and investors 18.6%, while the SMA Group holds 2%.

In November 2021 (finished in February 2022), LNA announced that a group of historical investors (Soparex, Unexo and Sodero Gestion), new investors (BNP Paribas Développement and SMA Group) and family investors (Siret holding company) acquired the shares held by Mérieux Equity Partners and Mesnard family (sale of 657,714 shares). The transaction was completed at €52.5 per share or a 4.8% premium over the last 20 trading days. This strategic transaction at a slight premium testifies to the confidence granted by historical and new investors on LNA’s long-term prospects. Moreover, the Group announced the completion of a capital increase reserved for employees for €2.37 million (1,100 subscribers) and the purchase of shares from 700 employees through the company LNA Ensemble for an investment of €47 million at €52.5 per share. At the start of 2022, 2,500 employees were holding 10% of the capital of LNA. Through employee participation, LNA further strengthen the alignment of interests, concern for the common good and the sharing of value. The capital increase was to fund their growth portfolio, M&A and expansion into Poland. They also wanted to increase employee ownership.

Market

An ageing population means more people will have increasingly complex care needs, and for longer periods of time, as diseases such as dementia become more prevalent. Moreover, the old age dependency ratio, the number of people aged 65 and over compared to the number of working aged people, is also increasing. The rate of change differs across Europe. In France, the population aged 65 and over is expected to grow by 20% between 2022 and 2032 (12) . According to the National Institute of Statistics and Economic Studies of France (INSEE), the percentage of persons aged 65 and over is forecasted to peak at 26.5% of total population by 2040, representing 18.3m people (7). Dementia, often caused by Alzheimer, is responsible for 50% of residents while cardiovascular is responsible for 33%. Meanwhile the supply of beds in France is restricted with approximately 600,000 to 700,000 beds and no new licences issued in the last six to seven years.

There are four types of nursing home EHPADs in France, two for-profit and two not-for-profit. For-profit EHPADs are split to private homes usually part of a national group (Etablissement privé à but lucrative) and state-owned homes (Etablissement public territorial) run by municipalities. Not-for-profit EHPADs are either managed by an association (Etablissement privé à but non-lucratif) and usually offer cheaper accommodation or by the state (Etablissement hospitalier), usually attached to a local hospital for administration purposes.

In France, there are around 7,400 nursing and cares home, together offering a total capacity of approximately 600,000 beds (9). 50% are state-run with average day rate of EUR51, 25-30% are for-profit private with average daily rate of EUR 75, and 20-25% are non-profit private organisations with average daily rate of EUR 60 (1). The French private for-profit providers can be divided into two groups: one for providers with more than 15,000 beds and one for smaller providers mainly owned by their founders. The dominant players are Korian (24,914 beds), Orpéa (19,922), DomusVi (18,205), LNA (9,335 beds), Colisée (7,634) and Domidep (6,741) (10). Worth noting that LNA is the only founder-run institution from the list.

In France, there is a substantial difference between social health-care institutions (EHPAD, EHPA, residences autonomie) and senior rental residences (residences services seniors). Social health-care institutions are strictly regulated (Articles L. 31101 et seq. of CASF), while senior rental residences (assisted living facilities), housing complexes made up of self-contained dwellings, do not fall under the strict regulations set forth by CASF.

Operators are required to gain prior approval from local authorities before they can build, open, or operate a new nursing home. In a regulated market, growth is primarily determined by the legal framework of developments. Since 2012, regulators in France have authorised, extensions aside, very few openings of new nursing homes. The reasoning behind this strategy is twofold. From one side, government is not incentivised to increase the number of licences since the state fully covers the medical staff salaries and partially the medical equipment cost. Authorising new licences will simply increase state’s healthcare budget. On the other side, government is incentivised to unload state-owned/run facilities by passing the licences to private operators. Such practice decreases healthcare budget and improves elderly care standards through facility renovation and upgrades. From the private operators’ side, the existing regulatory framework offers a growth avenue through acquisition of existing licences while it protects incumbents from new entrants through blocking an at scale invasion.

Risks and Debates

Leverage

At first glance, LNA looks like another levered nursing home. Splitting the company in operating and real estate segments however tells a slightly different story. As per first half 2022 report, the operating business had a net debt of €133 million which on last-twelve-months EBITDA (Exc. IFRS16) of €76 million does not look excessive at 1.7x net debt/EBITDA. On the other side, the real estate segment had a net debt of €203 million but generated just €9 million EBITDA. Clearly the real estate business looks more problematic. Real estate debt relates to properties bought for refurbishment and only stays for a short period of time on LNA’s balance sheet. Real estate debt is not ring-fenced and interest is paid by the operating business. This link between the two segments is what we believe to be the most important risk of the LNA thesis. Leverage against properties which could be valued lower in an increasing interest rate environment could indeed create troubles. Covenants are designed to monitor both the operating and the real estate business with operating debt to EBITDA below 4.25x, operating debt to Equity below 1.25x, real estate debt below €340 million and Real Estate EBITDA positive. At the first half of 2022, all conditions are comfortably met (1.7x, 0.5x, €203, €9m). Property revaluation could theoretically trigger the operating debt to Equity covenant and should be monitored closely.

Operating net debt to EBITDA LTM 1.7x
Operating net debt + Real estate net debt to EBITDA 3.9x
Operating net debt + Leases (excluding RE) to EBITDA 4.5x

Regulation and State Dependency

Post Orpea scandal, the French government published a series of measures aimed at improving the quality, transparency, and controls of nursing home activities. The objective of additional controls is to inspect the 7,500 French facilities, public and private, over the next two years with reinforced control of the use of public money by the operators. On service quality, the government will monitor facilities though external audits and increased staff training standards. Finally, the government pushed for increased transparency through publishing KPIs such as food budget, staff/resident ratio, presence of medical staff during the night as well as customer satisfaction surveys.

Overall, the new regulatory framework is expected to increase controls and transparency. Non-compliant institutions would need to improve staff/patient ratios and implement service enhancement changes, which will likely come with an additional cost. However, based on discussions with the management, LNA welcomes these regulatory changes since they will allow the Company to compete more efficiently and reduce budgeting discrepancies versus peers. We were positively surprised by that reaction. This is likely an example of where increased regulatory oversight further entrenches incumbents.

Reputational Risk

Exemplified by the recent developments around the Orpea scandal, reputational damages could significantly affect occupancy rates but also bring ire from politicians in a highly regulated sector hence reputation should be a major focus for nursing home operators. Based on our research, the only such incident related to LNA was the accusations regarding the Les Oiseaux facility in the summer of 2022.

The Oiseaux facility was acquired in 2013. According to the management, it was always an atypical activity with primary focus on childhood obesity, unlike anything else in the group. The facility accepted children for long stays to fight obesity. The children could potentially go on short trips away, which the company incorrectly invoiced to the government healthcare insurance provider. Upon acquisition, invoicing procedures were already in place and after consulting a legal counsel, management decided that everything was rightfully done. However, during an inspection in June 2019, six years after the acquisition, the regulator identified invoicing errors. The regulator didn’t initiate any legal action as they recognised it as a good faith mistake. LNA immediately reimbursed the monies. The facility was already loss-making and they wrote down the acquisition and the subsequent €15 million investment in the facility and decided to permanently close it.

However, in June 2022, an RMC radio show resurfaced the incident in the aftermath of the Orpea scandal. Apparently, the report was part of multiple attacks against the group triggered by few employees who resisted the closing of the Oiseaux facility (15). We consider this immaterial to the group and the facility has now been shut down.

On the other hand, we have heard multiple stories where the company went above and beyond to provide excellent service. We have not read the book <Les Fossoyeurs> but we have been told that LNA was even positively mentioned in the book. Several experts we spoke with have indicated that LNA has a stellar reputation.

Occupancy

The 95% occupancy level is not just a yardstick of healthy operations. It is more like a commitment to French authorities since facilities cannot receive subsidies for empty beds. Occupancy rate thresholds are set on national level and subsidies are paid on the previous year’s reported occupancy rate figures. Thus, any nursing home with occupancy rate for permanent accommodation of less than 95%, will see a reduction in the care and dependency packages equivalent to half the difference between the rate achieved and the threshold of 95%. The regulator recognised 2020-2021 as exceptional years, due to Covid, and now (Orpea/Korian) lobbyists are pushing to include 2022. Reducing the threshold from 95% to 90% is also being pushed. Absent any operational flexibility, subsidy reduction could add further pressure and force the low-performing operators to reconsider underperforming facilities. For LNA, an operator with historically and current high occupancy rates, that could be an opportunity since it could accelerate growth through licence acquisitions. We do not see any challenges here for LNA.

During the fourth quarter of 2022 occupancy rates in nursing homes stood at 94% with Elegance at 94% and Comfort at 97%, testifying to the constant appeal of the service offer. In Belgium, occupancy rate remained at 90%. Medical and Rehabilitation, Psychiatric and Surgery occupancy rose significantly by 6.3% points over the quarter, approaching full capacity. It is worth noting that the occupancy rate was significantly above peer group average, particularly Orpea (82.1%) (16) and Korian (87.8%) (17) , which suffered the most from the recent developments.

Staff Supply

There is a structural lack of trained staff in the market which affects the whole industry and adds to inflation pressure. High standards of customer service including a good nurse to patient ratio, high quality food, and good access to doctors is where the value is created in a nursing home. Attracting the most qualified staff is key to the long-term success. Industry experts believe that operators could attract and retain people by offering good work-life balance beyond adequate compensation. Moreover, home clustering in the same territory and optimisation of staff usage could also alleviate staff supply shortage. Based on discussions with the management and industry experts, staff supply shortage is a key challenge for the industry. We believe LNA is well positioned due to their reputation and training on offer.

Inflation & Energy

Approximately 50% of sales go to cover the personnel cost. Hence, any force that impacts that line directly affects margins. Inflation combined with staff supply shortage is indeed a risk to be monitored closely. However, state funding includes inflation adjustments that protect operator from higher salaries. LNA receives additional funds for medical staff though health insurance system to cover salary inflation. Non-medical staff increases should be covered, up to a certain level, by tariff renegotiations at the beginning of the calendar year. That said, salary inflation has some mitigants that could help margins to normalise over time.

The group's energy costs were 2.9% of revenue in the first half of 2022, compared with 1.9% in the first half of 2021. According to management, energy is covered until 2024 except the four facilities in Belgium. Sensitivity to energy cost volatility will be on a small scale as LNA has negotiated its contracts for 2022 and 2023 (gas and electricity), unlike Korian or Orpéa which are expected to be harder hit in 2023

Valuation

The nursing home sector was highly respected in the investment community for many years.
LNA historically was trading 12-14x EV/EBIT pre IFRS 16 and 18-20x post IFRS16 or 1-5% FCFE yield.
Whereas its largest peers Korian was trading at 15-17x EV/EBIT pre IFRS16 and Orpea was trading at 25-30x pre IFRS16 and both at 1-5% FCFE yield.

However, these scandals plus the general market retreat and higher interest rates on their property portfolios have now deflated the high valuations. We are now able to benefit from far more attractive valuations.

We forecast the growth in beds and the sales and EBITDA per bed as they reach “cruising speed.” Once we forecast the EBITDA, we find the free cashflow by subtracting rents, net financial expense, taxes and maintenance capex. We then use a multiple of this free cashflow to value the business (between 15 and 20x, here we use 18x). We think this multiple is fair as the company has grown EBIT from 2016 to 2021 at an 10% CAGR and has produced more than 20% return on tangible capital in years without COVID. We think the growth pipeline looks attractive and any margin recovery could further improve boost our forecasts. We also think accretive M&A may occur as there are distressed sellers in the market.

We forecast 165m EBITDA in 2024 and subtract 70m rents, 12m interest expense, 24m in taxes,17m in maint. capex and -2m other to arrive at 40m FCF which gives us above 120% upside. I think 15-20 is a fair multiple for a company growing EBIT at this CAGR and >20% ROTC.

To cross check we use 12x EV/EBIT of 80m 2024e we arrive at around 120% upside (962m EV - 256m debt - 6m other = equity 700m)

On our numbers using a few different scenarios and multiples we come up with a range of 70-150% upside in three years time.

We also note there is an ongoing share buyback, insider buying and we think management really wants to return to at least €52.50 to keep their employees happy.

(1) https://www.cushmanwakefield.com/en/france/insights/marketbeat-european-nursing-homes-report
(2) https://newsinfrance.com/another-fall-of-orpea-on-the-stock-market-after-financial-revelations-from-mediapart/
(3) https://www.businesswire.com/news/home/20221221005622/en/Orpea-Group-Additional-Information-on-the-Anticipated-Financial-Statements-for-the-Year-2022
(4) A group of French long-term investors led by the Caisse des Dépôts et Consignations, accompanied by CNP Assurances, and also including MAIF, accompanied by MACSF
(5) Five main institutions coordinating a larger group of unsecured financial creditors of ORPEA S.A.
(6) See appendix
(7) See appendix
(8) LNA publications
(9) See appendix
(10) See appendix
(11) https://www.savills.co.uk/research_articles/229130/333726-0
(12) Thirdbridge expert interview;
(12) https://www.scoresante.org/fiches_statiss.aspx?id=159
(12) https://www.savills.co.uk/research_articles/229130/333726-0
(12) https://www.cushmanwakefield.com/en/france/insights/marketbeat-european-nursing-homes-report
(13) https://www.cushmanwakefield.com/en/france/insights/marketbeat-european-nursing-homes-report
(14) https://www.cushmanwakefield.com/en/france/insights/marketbeat-european-nursing-homes-report
(15) https://rmc.bfmtv.com/actualites/societe/sante/lna-sante-un-groupe-d-ehpad-cote-en-bourse-fraude-plus-d-1-million-d-euros-a-l-assurance-maladie_AV-202206210266.html
(16) Company publications (4Q22)
(17) Company publications (4Q22)

Appendix

EHPAD: Nursing home referred as Medical-Social in Company’s reports – Acronym is derived from the France description of Etablissement d'Hébergement pour Personnes Agées Dépendantes (Residential establishment for dependent elderly people)

SMR: Medical and Rehabilitation Care - formerly SSR
PHY: Psychiatric Establishments
CHIR: Surgery
HAD: Home Care
HAH: Full-Time Hospitalisation

Catalyst

- Orpea restructuring completes
- Korian either restructures or demonstrates they can survive without one
- A year or two passes with decent earnings and no drama
- M&A from distressed sellers at good prices