Australia | Sep 04 2018
This story features REGIS HEALTHCARE LIMITED. For more info SHARE ANALYSIS: REG
The operating outlook for aged care providers is difficult, as revenue growth is constrained by a freeze on government funding. Regis Healthcare is weathering the environment better than most, brokers believe.
-Little or no organic growth the state of play in mature aged care
-Acquisition potential, given levels of regulatory pressure in the industry
-Will net debt exceed RAD flows from newly developed assets?
By Eva Brocklehurst
The operating environment for aged care providers is tough and Regis Healthcare ((REG)) has progressed through FY18 better than many. The operating environment is challenging because of cost growth across both mature facilities and those being developed, exceeding revenue growth that is constrained by an indexation freeze.
FY18 results were largely in line with expectations. Revenue was up 5% and reflected a contribution from new places, offset by funding cuts and pressure on occupancy. The occupancy rate was 93.4%, impacted by a severe flu season, versus 94.0% in FY17. Net flows from refundable accommodation deposits (RAD) was $63.0m versus $70.5m previously.
The company is guiding for flat operating earnings (EBITDA) in FY19, somewhat disappointing for brokers. Cash flow from newly bonded places is to be used to repay debt and this should provide capacity for acquisitions. Management has reported opportunities in this segment, as many operators without sufficient scale are struggling to absorb the funding cuts.
Ord Minnett had expected an improvement in FY19 earnings, although points out the completed development program should attract $250m-plus of RAD and a 15%-plus earnings lift by FY21. In the broker's opinion, Regis Healthcare is the number one operator in the sector.
CLSA, not one of the eight monitored daily on the FNArena database, believes Regis Healthcare is a good operator in a tough industry. The results are a reminder, the broker asserts, about the nature of aged care which, when mature as a business, tends to have little or no organic growth. CLSA reduces its rating to Outperform from Buy. Target is $3.75.
Ord Minnett concurs, lowering FY19 forecast by around -10% primarily because the company is cautious with its guidance, as it absorbs the remaining impact of funding reforms and the drag from developing new facilities.
The company, going forward, will focus on developments and greenfield opportunities. This should lead to medium-term upside, brokers suggest. Morgans considers this is the chief upside risk for the stock while downside risk lies with lower occupancy.
Moelis suggests acquisitions are likely from the second half of FY19, once net debt has declined, given the increasing levels of both financial distress and regulatory pressure being experienced in the sector.
UBS continues to envisage FY20 as the inflection point for development earnings, forecasting incremental operating earnings of around $16m, with a further $4m to come in FY21. Ramp up variability may drive changes to the balance between the years. This also suggests meaningful upside potential to guidance.
Macquarie envisages risk to aged care stocks in the near term and finds it hard to identify a reason to own the stock, subject to corporate activity. The broker is also concerned that net debt may exceed anticipated inflows from greenfield RAD contributions.
Capital expenditure has essentially been turned off for FY19 and this provides time for occupancy of new facilities to ramp up and RADs to be collected in order to reduce the debt load. Even so, separating out net deposits from new facilities versus the mature portfolio suggests to Macquarie there is still pressure on flows.
Management has noted the current development program will deliver 1247 new places by the end of the first half. To date in FY19 there has been net RAD cash flow of $20.4m. The profile of incoming residents that fund their own accommodation in full or in combination was 45.9% in FY18, consistent with the previous year.
Moelis, also not one of the eight, has a Buy rating and $3.97 target and finds the outlook compelling. The broker expects modest growth in operating earnings to be countered by a decline in net profit in FY19 and also expects the material reduction in development capital expenditure and strong RAD inflow should reduce debt in FY19.
Despite market concerns there may be a slowdown, the broker observes RAD flows have been solid. Meanwhile, reductions to government funding are expected to be fully grandfathered by June 2019, removing this is a headwind from FY20 earnings.
Moelis expects margin pressure in the mature portfolio will be largely offset by higher occupancy and any remaining shortfall will be more than offset by incremental earnings from the facilities being developed.
The database shows two Buy ratings, one Hold (Morgans) and one Sell (Macquarie). The consensus target is $3.91, suggesting 17.6% upside to the last share price. The dividend yield on FY19 and FY20 forecasts is 5.1% and 5.9% respectively.
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