Treasure Chest: Regis Healthcare

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Analysts at JP Morgan

The subject:

Regis Healthcare ((REG))

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Reforms underway to the Aged Care Act will boost earnings for Regis Healthcare by more than $40m (30%) by FY29 when fully phased in, according to JP Morgan.

The Federal Government is targeting long-term sustainability and increased investment into the sector.

JP Morgan has raised its 12-month target price to $6.70 from $5.00 after lifting earnings forecasts from FY27 and increasing forecast inflows for the annual refundable accommodation deposit (RAD)/maximum room price.

These deposit inflows have the greatest positive impact on JP Morgan’s higher earnings forecast, accounting for $30m of the $40m rise by FY29, with potential upside should RAD prices increase rapidly due to the upcoming shortage of places.

For the past decade, funding has been subject to political whims, highlight the analysts.

Now, an important element of the new Aged Care funding model is the role of the Independent Health and Aged Care Pricing Authority (IHACPA) to ensure funding keeps up with the cost of providing care.

Before the start of October, when the new care minute requirements (215 minutes per-resident-per-day, up from 200 minutes) come into effect, the IHACPA will issue the new Australian National Aged Care Classification (AN-ACC) rate.

According to JP Morgan’s sources, the rate may rise by around 10% to cover the 7.5% lift in minutes plus recent pay increases.

Applying to new residents only, the new reforms included an increase in the “maximum accommodation price” allowing RADs to be priced at up to $750,000 (indexed with the CPI), up from $550,000 (since FY14) without seeking approval from IHACPA.

Analysts at Jarden point out Aged Care Providers will be able to retain 2% per annum of the face value of a resident’s RAD across a maximum of five years. The remainder of the RAD can be refunded following the resident’s departure from the facility.

As Regis Healthcare has 2,200 RAD residents with an average RAD face value of $500,000, management will be able to retain 2% of these RADs, representing a net benefit of around $22m per year.

When considering residents who opt for a combination of a RAD and the Daily Accommodation Payment (DAP), JP Morgan calculates an additional $5.5m per year.

Like JP Morgan, Ord Minnett forecasts an $48m earnings (EBITDA) increase by FY28 (or $17 per resident per day) and raises its target to $6.40 from $4.90 on higher RAD pricing.

Describing the Australian Government’s move as “generational regulatory overhaul”, this broker sees Regis healthcare emerging with lower regulatory risk and a higher return on invested capital (ROIC).

In the analyst’s view, the aged care services provider now has a renewed growth strategy as RADs will allow the funding of developments and a stronger balance sheet will support significant M&A optionality.

Apart from accelerated capital deployment, upside risk could emerge from a number of sources, notes Ord Minnett, including higher accommodation supplements and higher RAD prices.

Following consensus-beating FY24 results for Regis Healthcare on August 26, Macquarie noted incorporation of RAD retention would provide further upside to its forecasts at the time, which resulted in an unchanged $5.50 target.

Macquarie has not yet updated for the new industry dynamics.

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