Australia | Dec 10 2019
Estia Health has reduced guidance for FY20 amid pressure on occupancy rates and revenue as the negative fallout from the aged care Royal Commission continues.
-Expansion in the supply of higher-care places could cause sector weakness to be protracted
-Homecare packages expected to expand by 60% by FY21
-Government relief unlikely until after the final report from the RC
By Eva Brocklehurst
Like the banking Royal Commission before it the current RC inquiry into the aged care sector has put the cat among the pigeons. For Estia Health ((EHE)) the negative publicity post the interim report from the Royal Commission has put pressure on occupancy rates.
Ord Minnett suspects occupancy is the largest single factor that led to the -10% reduction in FY20 operating earnings (EBITDA) guidance and an even larger reduction in profit expectations. Occupancy rates have slipped -0.6% since August, to 93.5%.
FY20 operating earnings are now expected to be $78-82m on mature homes vs $86-90m guided in August. Guidance excludes the earnings drag from new homes at Southport and Maroochydore, direct costs associated with the Royal Commission and a $7m profit on the sale of Mona Vale.
Moelis points out industry-wide weakness in occupancy appears to have been exacerbated by the maximum permissible interest rate (MPIR) on the daily accommodation payment (DAP) falling to 4.98% in the second quarter of FY20 from 5.96% in the fourth quarter of FY19.
The broker, not one of the seven stockbrokers monitored daily on the FNArena database, reduces FY20 operating earnings estimates by -13% across the whole aged care portfolio to reflect lower occupancy and revenue assumptions. Moelis, while acknowledging the difficulties, is still comfortable upgrading to Buy on a 12-month view, with a reduced target of $2.78.
Hopefully, the pressures from negative publicity will be short lived, although the latest data on the expansion in the supply of higher-care places in the sector could cause weakness to be protracted, Ord Minnett suspects.
Average daily revenue rates in the first half to date are up 1.5% and UBS considers this predominantly driven by the discounting of both additional service packages and room prices, in order to support occupancy. Overall costs in the first half to date are in line with the broker's estimates.
UBS updates assumptions and this results in a downgrade to estimates of earnings per share of -18-19% for FY20-22. This update is just the latest indication for the broker that residential aged care demand is soft and operators are struggling as overall bed supply expands.
UBS believes a confluence of factors will continue to drive deferrals in demand, including negative public sentiment and the rapid expansion of homecare funding. In the latter instance, the broker points out there were 84,000 people waiting for a package as of June 30 who were already approved for residential aged care admission.
With the total number of homecare packages expected to expand by 60% by FY21, the broker assesses a significant portion of people will continue to defer and in some cases forego admission to residential aged care under the presumption they will receive a package in the near term.
While some industry bodies are urgently calling for the government to boost funding, Ord Minnett doubts this will occur, given the clear advice from the Royal Commissioners. Macquarie agrees and anticipates further headwinds to occupancy from increased funding for higher-care packages and the removal of 6000 younger residents from facilities, the latter being a directive from the interim RC report.
Moreover, the broker contends a reduction in sedation, widely criticised in the RC as being over-used in these facilities, is likely to increase the wage expenses for operators as more staff will be required. The broker struggles to identify any major policy changes to support operators until the final report from the Royal Commission is handed down in November 2020.
UBS suspects a circuit breaker may eventually be forthcoming. After the Royal Commission tables its recommendation, the broker expects the government to move on longer-term sector reforms, including addressing the funding framework.
This could involve a replacement for the aged care funding instrument (ACFI) and some level of resident funding deregulation. The broker assesses the business is a quality operator with one of the largest residential care portfolios in Australia and it could leverage an improving demand profile over the next decade. In the near term, UBS is cautious.
FNArena's database has four Hold ratings for Estia Health. The consensus target is $2.50, suggesting 3.3% upside to the last share price. The dividend yield on FY20 and FY21 forecasts is 5.4% and 4.8% respectively.
See also, Aged Care Moves Into The RC Spotlight on September 20, 2019.
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