WHEB Commentary

Ben Kluftinger

Why we invest in – Orpea


It’s Good Money Week so we wanted to highlight how impact investing needn’t just be good for society and the environment, but how it can also be a good investment. We’ve chosen one of our portfolio holdings to highlight this.

WHEB believes an ageing population is one of the key sustainability challenges the world faces. We see caring for the elderly as an area where we can have a significant positive impact but there is also a strong investment case. One of our portfolio holdings is Orpea S.A, which predominantly operates nursing homes for the elderly in Europe. We asked Ben Kluftinger, senior investment analyst at WHEB, to tell us more about the stock.

  1. What does the company do?

Orpea is a leading European elderly care home operator but also runs rehabilitation and post-acute care as well as mental health disorder facilities. It manages more than 86,000 beds across a total of 12 countries and is expanding now also outside Europe. The company was founded in 1989 and is head-quartered in France.

  1. Why does WHEB believe this stock is a good investment?

The company is operating in a highly attractive industry driven by long-term demographic trends of growing numbers of elderly and rising global affluence among them. Orpea is strongly positioned within this industry generating healthy mid-single-digit organic growth and acting as a highly selective consolidator. Its business model has a very strong focus on quality and risk management, which has resulted in stable, profitable growth.

  1. Tell me about the industry in which the stock sits

Elderly care is a growth industry. The projected growth in over-80s from 2016 to 2050 is 3.5% on average world-wide with higher growth in emerging markets. In Orpea’s current markets, more than 1 million new beds are expected to be built until 2030 (excluding China). In addition, the market is still highly fragmented and has a high portion of public care which will offer plenty of consolidation opportunities.

  1. How is this stock unique or interesting within the industry?

Orpea stands out within its industry as one of the highest quality operators. Its facilities are mostly located in attractive prime locations and maintained to the highest standards. For example, facilities have the most modern equipment, are user-friendly and operated by highly trained staff. Safety and comfort are paramount. The company conducts regular satisfaction surveys with residents/patients/relatives and in 2017 93.7% of respondents said they would recommend Orpea to somebody close to them. As a result of this quality focus, utilisation of Orpea’s facilities is high. The company also invest in new, innovative concepts such as virtual reality in psychiatric care to help patients overcome phobias or optical sensing for fall detection assistance. At the same time, it has developed best-in-class cost management thanks to its extensive use of IT and data analysis resulting in very attractive operating margins. Orpea uses its expertise to acquire carefully selected, less well run facilities and gradually improve them to those “Orpea standards” which in turn increases utilisation and thus profitability.

  1. What are some stats or facts that support your theory/opinion?

Since 2007, Orpea has grown its revenues and EBITDA by 19% annually while beds expanded by 15%. This growth has primarily been generated outside is home market in France showing Orpea’s ability to “export” its successful business model to other countries. The company has a stable EBITDAR margin profile (~27%) even though it regularly acquires lower margin operators and is expanding into new countries.

  1. What are the 3 – 5 main reasons you are invested in this stock?

We like Orpea for a number of reasons. It benefits from a demographic megatrend which will keep its industry on a growth trend for decades. Within its industry, Orpea is the highest quality operator which helps generating stable growth and profitability. The company is in control of bed prices which are stable to mildly rising. Its international expansion strategy should keep top-line growth close to 10% annually for many years to come. It benefits from a strong, risk conscious management team with a long-term strategy focus. Lastly, partially thanks to our own engagement, Orpea has an improving and by now good ESG record.

  1. What else should we know?

Orpea has a growing real estate portfolio aiming for a 50% ratio of owned vs leased properties (currently 45%). This makes its leverage ratios look stretched on first sight. However, 85% of Orpea’s debt is real estate debt and the company is operating well within its covenants. Its cost of debt is steadily falling (now 3.1%) and is not exposed to potential interest rate increases. The company is not an asset trader – it has a multi-decade investment horizon and its properties serve entirely its care business.

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