Australia | Dec 07 2016
This story features ESTIA HEALTH LIMITED, and other companies. For more info SHARE ANALYSIS: EHE
The government and aged care sector have reached broad agreement on funding and brokers welcome the reduction in uncertainty.
-Volume of those affected by cuts to funding reduced
-Imposition of indexation freeze in FY18, FY19
-Modifications spread funding cuts more broadly
By Eva Brocklehurst
After a period of uncertainty, it appears the aged care industry and the government have reached some broad agreement on funding. The Australian government has tweaked its budget measures relating to the Aged Care Funding Instrument (ACFI) and will reduce the volume of existing residents with "high complex care needs" affected by previously announced cuts to funding.
Under previous plans, CLSA estimates around 30% of residents claiming the subsidy would be in line for reclassification. Under the changes, while these cuts will still occur, the volume of those affected will be reduced by around 30%, the broker calculates. A less positive decision is the imposition of an indexation freeze on ACFI subsidies in FY18 and a freeze on 50% indexation of the complex health care domain in FY19.
CLSA's industry contacts are as yet unable to quantify the potential impact of these changes and the broker continues to advocate investors remain underweight the sector. The next catalyst is likely to be the government's Mid-Year Economic and Fiscal Outlook (MYEFO), scheduled for December 19.
Morgans notes the aim of the government is to grow aged care funding by 5.1% per annum over the forward estimates and currently these estimates are running at 6.8% per annum. The changes just revealed are due to come into affect on January 1. Given forecasts were adjusted after the relevant companies' FY16 results, Morgans is comfortable that these reflect the new arrangements.
The broker's valuation of Japara Healthcare ((JHC)) is unchanged but the broker's recommendation is reduced to Hold from Add, given the rally in the share price. The downside risk to the broker's target of $2.47 is considered to be an inability to pass an additional cost to residents, while upside risk revolves around the attractive acquisition opportunities emerging.
In aggregate, the modifications reduce the impact on the three listed aged care businesses, Macquarie estimates. The broker retains a Outperform rating for Japara Healthcare as, even after a couple of strong days, it still trading at an attractive discount to valuation. Macquarie has a Neutral rating on Estia Health ((EHE)) and Regis Healthcare ((REG)).
UBS expected the government to moderate its stance. Given that the top ten operators are disproportionately providing complex care, they were over-represented in the proposed cuts, whereas indexation has the effect of distributing the cuts more broadly. The broker notes the government has begun a review of ACFI to evolve a more robust system, in part a response to sector representations appealing for a more consistent policy and funding outlook.
The broker hopes that a simplified system offering greater certainty may yet supersede 2019 projections. All major listed operators have provided and reiterated FY17 earnings guidance, but notably declined to comment specifically on FY19. Market consensus estimates apply the cuts on an unmitigated basis to growth forecasts and price targets and UBS expects this will reverse as a result of the government moderating its stance, as well as with company commentary at the first half results.
Morgan Stanley envisages no reason at this stage to change forecasts. The broker agrees some of the burden has been removed from the top quartile of operators and is more evenly spread, but does not consider it a significant shift. The broker has estimated the impact of ACFI changes would cost listed operators up to $20 per day over the next three years, or a 4% decline, offset by indexation and resulting in a net 2% decline in underlying ACFI revenue per annum.
While too early to know the exact impact of the changes, the broker believes it highly unlikely that the benefits of complex pain management will substantially offset the impact of indexation cuts.
The announcement reveals a more positive relationship between the government and industry but Morgan Stanley does not believe this indicates a return to a growth phase, as revenue is still under pressure and costs are growing. Until the broker is comfortable that the businesses are not going backwards organically it does not believe the stocks should trade at historical premium multiples.
On FNArena's database Japara Healthcare has two Buy ratings, one Hold and one Sell. The consensus price target is $2.32, suggesting 6.8% upside to the last share price. The dividend yield on FY17 and FY18 forecasts is 5.9% and 6.0% respectively.
Estia Health has one Buy, one Hold and one Sell. The consensus target is $3.28, signalling 17.3% upside to the last share price. The dividend yield on FY17 and FY18 estimates is 8.3% and 7.4% respectively.
Regis Healthcare has two Buy ratings and one Hold. The consensus target is $4.69, signalling 9.1% upside to the last share price. The dividend yield on FY17 and FY18 forecasts is 4.7% and 5.2% respectively.
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