Long road ahead for aged care sector, as major players release ASX results

Recent release of Estia Health, Regis Aged Care and Japara Heathcare results a “rollercoaster” of activity, say industry experts

- An observation by Shalain Singh, head of Healthcare & Retirement Living

A great start to the aged care players’ results last week saw Estia Health share price rally on the day of release by some 12 per cent off the back of even greater disclosure, a clear path for stabilising earnings and providing growth into medium term. The climate then mellowed a little with Regis Aged Care results and dived today post Japara Healthcare announcement, seeing share prices for both decline by 4.6 per cent and six per cent respectively.

What was supposed to be a largely no surprises and steady as she goes results season for the aged care players turned out to be a tale of three cities. In the analogy, Estia is a little like the USA, with a new management team in town promising to make the provider great again. In contrast, Japara is like Australia with a history of strong growth, and plenty yet to deliver while dealing with a number of internal challenges. Then there’s Regis – much like China, it is continuing to grow and diversify but when pressed for details, the aged care provider simply says details will be forthcoming.

Fundamentally, the importance of continual asset delivery, both greenfield and brownfield, to offset earnings and capital pressure was heightened, as both Regis and Japara sighted the increase in physical places as the major contributor to both capital gains (net RAD inflow) and incremental EBITDA earnings growth. Estia is just on this journey and, just like America, may be seeking to revive its “manufacturing belt” in the near term to fuel EPS growth in the long term. Of course, its greatest constraint is the availability of licences, which the other two have the majority of for their requirements.

But where does the roller coaster stop? Keeping with the country analogy, the healthcare sector in Australia is undergoing a significant amount of change, with implications to every aspect of the economy, including fiscal viability. Estia (America) has a long road ahead of it and returns have to be carefully balanced against strong internal operations and market expectations (both consumer and investor) – only time will tell whether the strategy and implementation are right.

Regis (China) has decided to further diversify and the real opportunity is in ensuring that it can leverage its existing development pipeline to rapidly enhance its output, as opposed to tangential experimentation in a non-core discipline, where the retirement village market is arguably already overcrowded.

Lastly, Japara (Australia) has the greatest potential for upside and is arguably best positioned to handle the headwinds – however, the healthcare provider is being plagued by perceived issues in its internal mechanics (staff and systems), with the only way out being development unless the fundamentals change. Diversification, if being thought about is not being talked about, and in the absence of any other information, one has to assume that it’s a case of growth in the past, which will result in growth in the future, albeit with some bumps along in the way. That is, of course, until the road changes.

China has a history of taking on new things that are sometimes great in their own right but do not benefit the rest of the country. Not dissimilarly, Regis’ diversification into retirement living needs to enhance the group’s offering and will be an important defining factor for its longer-term growth aspirations.

All of the players (and economies) are seeking growth against a backdrop of significant change and margin pressure, while trying to balance the need for care and the increasing burden it presents. Unfortunately, none have the right answer. Add to this the uncertainty that comes from regulatory change (akin to the UN trying to do good but always thinking things through) and you end up with a trial-by-error environment that creates volatility.

Indeed, what the best solution is will unfold over time, underpinned by strong fundamentals of demand and supply – so why not stay on the rollercoaster and enjoy the ride?

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