The aged care industry in Australia provides a range of different services to elderly people and is a significant contributor to the Australian economy. In addition, the aged care sector is an important contributor to jobs and growth, providing services to over 1.3 million Australians. Aged care and Financial Authority (ACFA) recently suggested that this sector is facing increased financial pressure.
In recent years, the aged care industry has been at the centre of ongoing reviews and inquiries. The Government of Australia is bringing in reforms in the Aged care industry to improve the transparency for consumers and to raise the quality benchmarks for providers. Some may believe that the increased regulatory reforms have put an additional burden on the aged care sector. Timeline for some of the reforms can be viewed below.
(Source: ACFA Reports)
Demographic factors are the primary driver of increasing demand for aged care. It is observed that Australia’s population is not only ageing, but also has a longer life expectancy. This is bringing in significant challenges and opportunities for the aged care system, both now and in the years to come. Many research institutions have noticed that profitability in the sector is declining, with a growing gap between the larger well-capitalised providers and the smaller, often single home providers, which are losing money at an EBITDA level.
Estia Health Limited (ASX: EHE)
A provider of high quality residential aged care services, Estia Health Limited (ASX: EHE) currently has 68 operational homes in Australia. The aged care sector continues to have strong underlying thematics, which need to be supported by a strong and consistent policy environment. Estia Health Limited is supportive of further reforms and implementation of key recommendations from multiple recent reviews in the sector. This will help in improving the quality of services in the aged care sector, in anticipation of meeting the community’s expectations of care for which consumers are prepared to pay.
Number of Homes (Source: Company Reports)
The aged care sector currently has several investment opportunities which include:
- Regulatory Risk Removed: Regulatory Certainty;
- Productivity Improvements: Large well-capitalised providers will have the scale to invest in technology to improve care levels and raise productivity;
- Growth via Development: Large well-capitalised providers can secure funding to generate growth from new homes;
- Growth via Acquisition/Consolidation: Reducing the fragmented nature of a large part of the sector.
Estia Health was recently served with a class action proceeding filed by the law firm, Phi Finney McDonald in the Federal Court of Australia. The law firm has put allegations of breaches of market disclosure obligations in 2015 and 2016. Estia has assured that it will vigorously defend the proceeding.
In the first half of FY19, the Estia Health Limited reported EBITDA of $46.9 million, which was 3.1% higher than pcp. Further, the company reported NPAT of $21.1 million, which was 4.1% higher than pcp.
In a trading update provided in May 2019, the company advised that its full year FY19 EBITDA is expected to be in the range of $92 million to $94 million, representing an increase of 2% to 4% compared to FY18.
The company believes that the aged care sector requires greater transparency in reporting guidelines to make sure residents and their families have full financial protection. In order to do so, a provision of detailed, audited and publicly available financial statements is required for all providers of aged care services. Along with that, these aged care service providers also need to follow stronger capital and liquidity ratios and improved disclosure standards. Aged Care Financial Authority of Australia has predicted that by next decade, over 83,000 places will be required to meet the residential care needs of Australia’s ageing population.
Estia, being a leading provider of aged care services in Australia, has the capability in terms of people, services and financial resources to deliver high quality aged care services and play a vital role as part of a stable and sustainable aged care sector.
In the past six months, Estia’s stock has provided a return of 16.52% as on 17th July 2019. At market close on 18th July 2019, the stock was trading at a price of $2.700, with a market capitalisation of circa ~$680.17 million. Its 52-week high price stands at $3.300 and 52-week low price stands at $2.030, with an average volume of ~884,838.
Lendlease Group (ASX: LLC)
A leading international property and infrastructure group, Lendlease Group (ASX: LLC), operates one of the largest retirement living businesses in Australia. Last year, the company extended extensive retirement living capabilities into China. This project could potentially lead the company to further opportunities in the ageing demographics in Asia.
In the past six months, LLC’s stock has provided a return of 18.39% as on 17th July 2019. At market close on 18th July 2019, the stock was trading at a price of $14.770, with a market capitalisation of circa ~$7.95 billion. Its 52-week high price stands at $21.730 and its 52-week low price stands at $11.030, with an average volume of ~2,142,310.
Regis Healthcare (ASX: REG)
Australia’s leading aged care provider, Regis Healthcare (ASX: REG) delivered three new facilities in the first half of FY19. As part of its asset renewal program, the company is currently reviewing older facilities and those with some shared rooms.
Portfolio Overview of Regis as at 31 December 2019 (Source: Company)
In the month of September 2018, a Royal Commission into Aged Care Quality and Safety was announced. Time and again, Regis has announced that it supports the Royal Commission and any measures taken to improve the quality of aged care services for senior Aussies. Further, the company has assured that it will work with the Royal Commission and Government to ensure that the aged care industry is sustainable into the future.
The residential aged care sector is highly regulated, and the community expects Aged Care Providers to consistently achieve the minimum standards set by the Government for the sector.
The aged care sector is facing a number of challenges. A consistent policy and funding envelope is important to ensure the sustainability of the sector. Forecasts by the Government’s advisory body, Aged Care Financing Authority indicated that the demand for quality care will increase as Australia’s population ages, requiring a further 88,000 places over the next decade from the current level of around 207,000 residential aged care places available. The company believes that significant new investment is required to meet this forecasted industry growth, which can only happen if providers are able to achieve an adequate return on ACFA’s estimated investment required from the industry of $54 billion. This has become even more challenging, given the impacts of the funding cuts in recent years. Industry surveys indicated that the number of Aged Care Providers experiencing EBITDA losses is increasing and could now be around 21% according to a recent report by Consultant, Stewart Brown.
In the past six months, REG’s stock has provided a negative return of 4.63% as on 17th July 2019. At market close on 18th July 2019, the stock was trading at a price of $2.690, with a market capitalisation of circa ~$805.75 million.
Aveo Group (ASX: AOG)
Australia’s leading owner, operator and manager of retirement communities, Aveo Group (ASX: AOG) reported steady sales in the first half of FY19 written at an average of 19 sales per week while retirement unit pricing remained steady.
Key Financial Outcomes of H1 FY19
- Underlying profit after tax is $12.0 million driven by a number of unit settlements
- Written sales continued to be steady despite softening in the residential property market. Settlement timing has lengthened, leading to lower settlements and higher deposits on hand
- New unit deliveries of 80 exceeded forecast of 64 in HY19
- Underlying result affected by weighting to the second half for the delivery profile of Retirement Development and Non-Retirement asset settlements
- NTA per security decreased to $3.83 from $3.92 as at FY18, due primarily to adoption of more conservative DMF valuation property price growth assumptions.
The company is focused on leading the Australian retirement living sector through its commitment to care, innovation and choice for its residents and deliver growth and value to its securityholders. Despite the challenges in the current Australian property market, Aveo’s retirement living product remains attractive and demand for it is strong.
For the year ended 30th June 2019, the company announced an annual distribution of 4.5 cents per stapled security, which is within the guided range of 40% to 60% of underlying profit after tax.
In the past six months, Aveo’s stock has a provided return of 21.63% as on 17th July 2019. At market close on 18th July 2019, the stock was trading at a price of $1.940, with a market capitalisation of circa ~$1.13 billion. Its 52-week high price stands at $2.510 and 52-week low price stands at $1.500, with an average volume of ~2,072,347.
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