Growth Opportunities Abound For Regis Healthcare

This story features REGIS HEALTHCARE LIMITED. For more info SHARE ANALYSIS: REG

-Acquisitions and/or expansion potential
-Interest free, reliable funding base
-Latest govt policy change a positive
 

By Eva Brocklehurst

Regis Healthcare ((REG)) is a company that prides itself on providing high quality aged care. The company recently listed on ASX and has invested heavily in standardised systems to improve compliance and create scalability for its operations. Brokers believe the company stands out in a sector where there is a large variation in efficiency, hence profitability. What stands out for Macquarie, too, is the fact the company has added more places through developing its own, rather than via acquisition, over the past five to six years, in contrast to many of its peers.

Supply of aged care beds is tight, with average occupancy 93%. Given Australia's aging demographic, this tightness is likely to continue. The government is actively limiting bed licence growth to below demand growth as part of a goal to encourage more elderly people to stay at home for longer with additional help. That said, the industry has many features predisposing it to consolidation, such as its fixed pricing and economies of scale, as well as being highly fragmented, with the largest private operator having just 3.0% market share. This bodes well for Regis Healthcare in terms of expansion, in Macquarie's opinion.

One of the attractions of aged care is accommodation bonds, or refundable accommodation deposits, which residents lodge with the operators. The payments are held for the duration of the residents' stay. These bonds provide a substantial interest free and stable source of funding for facilities expansion and acquisitions. This means bed expansion is light on capital, with high incremental returns. Regis Healthcare stock is not considered cheap, trading at 13.8 times earnings but, as a top quality performer, Macquarie expects strong earnings growth will be delivered for many years to come. Moreover, there is an attractive fully franked dividend in place. The broker initiates with an Outperform rating and $4.40 target.

Morgans has also initiated coverage of the stock with a $4.60 target and Add rating, observing the aging population is likely to drive demand for places for the rest of the decade, at least. The broker notes the company has a track record of high levels of care with opportunities to expand by acquisition or development, allowing it to play a major role in the future of the aged care industry. The broker treats accommodation bonds as working capital in its discounted cash flow model. Like Macquarie, Morgans considers accommodation bonds are an attractive feature of aged care. As government health care funding is under pressure the broker believes the trend will increasingly move towards user pays models. This should benefit efficient operators such as Regis Healthcare, positioned as a premium provider in metropolitan areas.

As with any highly regulated industry there are risks in that government framework, and policy can change. A number of changes were implemented on July 1, 2014, to shift more funding for aged care to those who can afford to pay, to create more choice and attract private investment into the industry. One of the key changes is that the bonds can now be charged to high-care beds, which increases the number of bondable places by 40-50%. Macquarie has modelled the net impact to be slightly positive for providers.

Regis Healthcare is the third largest private Australian residential aged care provider with 45 facilities located in five states. The service is targeted at the premium end of the market, with a focus on extra services and high care.  The aged care sector most closely resembles private hospitals in that the majority of income is related to services and costs are derived mainly from nursing wages and consumables. This is opposed to a retirement village model where service fees contribute a small proportion of revenue. Regis Healthcare's closest listed comparable is Japara ((JHC)) but the stock retains similarities with other health service providers in that the majority of revenue is regulated by, or comes from, government and it has exposure to Australia's growing demand for health care services.
 

Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.

Click to view our Glossary of Financial Terms