Competition For Licences In Aged Care Intensifies

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

-Regis tops listed company allocations
-Estia's allocation disappoints
-Sector remains well supported
 

By Eva Brocklehurst

Competition in the aged care sector is intense, as the industry develops and builds retirement villages and nursing care to accommodate a growing need but requires approvals in the form of bed licences from the federal government.

The 2015 approvals round for the acquisition of new aged care places has been completed. The Department of Social Services received applications for 38,859 new residential aged care places and awarded 10,940. This compares with 2014 when 11,196 places were awarded after the receipt of 19,169 applications.

Morgan Stanley is surprised by this, having expected approvals would increase to indicate a shift to bed licence de-regulation. The largest listed recipients were Regis Healthcare ((REG)), Japara Healthcare ((JHC)) and Aveo Group ((AOG)).

Aveo received approval for 371 places and the broker believes the company's retirement strategy has a clear focus on care, which will attract more residents to the villages and drive earnings. The company has seven villages in the pipeline, expecting one to be completed per annum. Regis and Japara received 844 and 313 places in the allocation respectively, covering their building pipelines to FY19.

Estia Health ((EHE)) received just 12, having been knocked back for licences at its Craigmore and Twin Waters developments. Nevertheless, this is a better outcome in the light of 2014 when the company received no allocation.

Management is confident it can use other licences it holds to complete these projects to plan. Nevertheless, brokers were disappointed at the outcome and believe the company will need to apply for more licences down the track to deliver on its development plan. CLSA analysts concur. In 2016 Estia Health will focus on integrating its acquisitions but retains a plan for 300 or more brownfield and up to 1,000 greenfield places by FY20.

Combined, the listed operators won 10.7% of the available places, above their combined market share of 8.0%. On the basis of this latest round, CLSA analysts believe that, over the longer term, the listed players are likely to build more places and hence grow faster than the rest of the industry.

Deutsche Bank notes the key attraction in the sector is the development opportunity, driven by the expected rise in the aged population. Hence, allocations to both Regis and Japara should support their development plans and deliver a strong uplift in cash flow.

Estia Health's situation is less secure, because of the lower-than-expected allocation, but its development plans are not yet at risk, the broker contends. Deutsche Bank believes the stock offers valuation appeal and it still has sufficient places to support its plans for FY16 and FY17.

The company intends to re-apply for places for its first greenfield project, Twin Waters, at next year's round. As most of its projects are more than two years from scheduled opening there should be sufficient time to secure the required places, in the broker's view.

A total of 62% of the licences this time went to greenfield sites and the rest to re-developments. Regis Healthcare's allocation was second only to Bupa and equated to nearly 8.0% of the total allocated. Deutsche Bank expects this latest allocation will underpin most of its development plans outlined to FY20.

Macquarie also concludes that the outcome was very positive for Regis and less so for Estia, which may slow down a couple of its developments. Aged care development carries high returns on invested capital and is highly value accretive, the broker observes. Macquarie remains positive on the sector.

Deutsche Bank notes the allocations of places by state were mixed. There was a 12% drop in NSW allocations to 2,875 and a 17.9% increase in South Australian allocations to 250. The largest number of places allocated were in Queensland, at 3,120. Northern Territory received an allocation of 65 places, with there being none in 2014. Those operators picking up the most places, in excess of 500, included Bupa, Regis, ICL and Opal.

On FNArena's database Aveo Group has three Buy ratings and one Hold, with a consensus target of $3.63, suggesting 10.6% upside to the last share price. Estia Health has three Buy ratings and one Hold with a consensus target of $7.16, suggesting 19.6% upside. Regis Healthcare has two Buy and two Hold ratings. Target is $5.86, signalling 11.7% upside. Japara Healthcare has two Buy and three Hold ratings with a target of $3.27, signalling 7.5% upside.
 

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