Brokers' take: DBS downgrades Econ Healthcare to 'hold' as S$4m share investment nosedives 84%

DBS Group Research has downgraded Catalist-listed nursing operator Econ Healthcare (Asia) EHG : EHG 0%to "hold" from "buy" and revised its target price for the stock to S$0.28 from S$0.40, a day after its share investment turned sour.

Econ recently invested about S$4 million of its idle working capital into 11.8 million shares in Crosstec, a Hong Kong-listed interior design firm.

But Crosstec nosedived 84 per cent on Tuesday (Jan 11) to HK$0.38, which implies a potential investment loss of over S$3.2 million for Econ, equal to about 118 per cent of the company's net earnings projected for FY2022.

The S$4 million investment represents 10 per cent of Econ's shareholder equity, which was forecasted for March 2022.

Highlighting these in a report on Wednesday, analyst Paul Yong said that while the losses could be recouped, he was of the view that Econ's investment mandate and strategy "should be tightened significantly".

"While the company stated that the investment was intended to improve the yield on idle cash through dividends and share price appreciation, the investment of the majority of its idle cash into a single, loss-making, small-cap company is a riskier decision than one would expect," the analyst said.

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"In our view, the company should reconsider its investment mandate and strategy."

The target price was lowered as Yong raised Econ's weighted average cost of capital to 11.8 per cent to reflect heightened uncertainty and risk in the company's financials stemming from this development.

Moving forward, the brokerage would "wait for further clarity" on the company's plans for its investment strategy before turning positive, although prospects for Econ's core nursing home business remain intact, he pointed out.

Key risks for Econ include lower-than-expected occupancy rates, which could affect the company's core business, and continued risky investments, which could cloud the company's outlook, he added.

Econ operates premium private nursing homes in Singapore and Malaysia, and has a presence in China. Shares of the counter were trading down 3.5 per cent or S$0.01 at S$0.28 as at 1.34 pm on Wednesday.

READ MORE: 

• Brokers' take: DBS expects Econ Healthcare to gain from ageing population; initiates with 'buy'

• Econ Healthcare posts 41.2% rise in full-year net profit to S$5.7