Last week, the government announced a Royal Commission into the aged care sector. This follows reports of an increase in the number of aged care facilities which pose a serious risk to their residents. The findings will likely result in tighter regulation and audits for the existing operators.
A quick industry overview – there are about 200,000 beds across 2700 facilities in Australia. Industry reports suggest this number needs to grow by 83,000 beds over the next 10 years. The not-for-profit organisations control 56 per cent of the facilities, the private operators 39pc and the Government 5pc. The annual revenue of the industry is $17.2 billion, of which government funding contributes $11.3b (or 65pc), with residents contributing $4.5b and the balance of $1.3b being from other sources. Government funding has been static over the past two years after cuts announced to the ACFI scheme.
Within the private listed operators:
Japara Healthcare (JHC) – has 48 facilities and 4069 operational places, 78pc of their portfolio is in the metropolitan or major regional areas. Management has provided guidance of earnings before interest, tax and depreciation growth for 5pc to 10pc for 2019 after posting a decline of 16pc in 2018.
Regis Healthcare (REG) – has 60 facilities with 6753 operational places, 77pc of their portfolio is in the metropolitan or major regional areas. Management has provided guidance of earnings before interest, tax and depreciation for 2019 to be line with FY18, after recording a 5pc decline in 2018.
Estia (EHE) – has 68 operational homes with 6046 places, 77pc of their portfolio is in the metropolitan or major regional areas. 2019 guidance has been provided of mid-single digit earnings before interest, tax and depreciation growth, after recording growth of 4pc for 2018.
As a result of the Royal Commission being announced the share prices of each of the listed companies discussed above have come under heavy selling pressure. The sentiment impact and what may ultimately flow from the Royal Commission will overhang the sector for some time. The three listed companies have prided themselves on providing high standards; however the fragmented nature of the industry means many smaller operators are struggling to comply with the high level of regulations.
The sector is also facing a number of government reforms, with recommendations being made like uncapping bed supply to drive more capital investment, 'user pay' being extended to those who can afford to pay, and uncapping the daily care fee. We think the strong underlying ageing thematic needs to be supported by strong and consistent policy reform. Increased audits and regulations will lead to higher costs, although acquisition opportunities may emerge as weaker players sell or exit the sector. Given the uncertainties and the unknowns within the sector at present, it makes it a difficult industry within which to invest capital with any type of confidence until more is known.
- Justin Still, Investment Adviser (Authorised Representative: 000279726) Morgans Financial Limited | ABN 49 010 669 726 | AFSL 235410