Regis Healthcare Continues To Impress

This story features REGIS HEALTHCARE LIMITED, and other companies. For more info SHARE ANALYSIS: REG

-FY15 forecasts upgraded
-Outperforms on most metrics
-Acquisition, growth opportunities

By Eva Brocklehurst

Regis Healthcare ((REG)) posted a solid maiden first half result as a listed company, well ahead of brokers' forecasts. Revenues from the government were higher, reflecting a lift in payments for resident care.

The aged care accommodation provider has upgraded earnings forecasts for FY15, reflecting a much larger than expected inflow from accommodation bonds. Deutsche Bank notes this, in part, reflects a on-off in relation to the introduction of the government's Living Longer Living Better legislation. The broker observes this growth will moderate in the second half but inflows should still be above prospectus forecasts. Allowing for the development pipeline and this stronger-than-expected result Deutsche Bank makes a significant uplift to valuation.

Morgans is upbeat, recommending clients add the stock to their portfolios. The stock outperformed on most metrics, in average revenue per bed, aged care funding and staff costs. The broker compares the stock with another recently listed aged care operator, Estia Health ((EHE)), noting that both companies agree about the big opportunities for acquisition and development that exist across the sector. Regis has added 135 places during the half year, with Regis Tiwi Gardens in Darwin, and has another 194 places under contract in Cairns due to settle in March. This will bring the number of aged care places to 5,049.

Morgans is aware that with an increase in the level of acquisition activity, the price that operators have to pay for facilities is likely to increase. The company was a little shy in disclosing the metrics for acquisitions but divulged to brokers that $100,000 per bed is a reasonable rule of thumb. Estia's recent purchase in Adelaide was priced at around $137,000 gross per bed, with further development opportunity. In this regard Morgans simply makes the point that attention to pricing metrics will be important to maximise returns. The broker suspects the low level of profitability across government-owned and the not-for-profit sector provides opportunities which will help underpin the company's growth for at least the next five years.

Regis Healthcare had already flagged the decision by the government to drop the payroll tax supplement from 2016 which will cost the group $6.4m and, as a result. second half earnings are expected to be below the first. Still, inflows from residential accommodation bonds were ahead of forecasts and represent around 92% of full year prospectus forecasts. This takes the number of bond paying residents to 46.8% from 43.4%.

Cost control, sales and progress in developments impressed Macquarie. High incremental returns on capital are generated by the company's model and remain a key differentiator in its success. The broker notes Regis will spend $10m on significant refurbishments in FY15 which should mean it qualifies for new government subsidies. So far 115 residents are receiving the higher level of funding of a total of 700 which are eligible, suggesting to Macquarie further tailwinds to come.

The three brokers covering the stock on the FNArena database all have Buy ratings. The consensus target is $5.49, suggesting 3.5% upside to the last share price.

 See also, Growth Opportunities Abound For Regis Healthcare on November 20 2014. 
 

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