Estia, Regis, Japara stocks at the mercy of health mandarins

The aged-care imbroglio highlights the dangers of listed entities that depend on the public purse.

It doesn’t sound like much: Amanda Vanstone’s sandwich and a milkshake, with a doughnut thrown in.

But multiply that snack as lost daily revenue across all aged-care residents and it equates to a week in hell for Estia Health (EHE, $3.22), Regis Healthcare (REG, $4) and Japara Healthcare (JHC, $1.90).

Investors are still grappling with last Friday’s decision by the Department of Health to disallow so-called “capital refurbishment and asset replacement fees”.

These operator-imposed imposts were aimed at offsetting a tweak to the Aged Care Funding Instrument (ACFI), which allocates per-resident subsidies according to their assessed needs levels. In short, residents will be ­“re-scored” more harshly under the measure, which targets savings of $528 million.

And in turn that prompted stockbroker Macquarie to estimate the $20 a day per-resident hit, based on a $20.50 per day impact for every high-needs resident.

Meanwhile, UBS aged-care watchers estimate the listed operators account for 7 per cent of all aged-care beds. “If we apportion that (impost) across all operators in the industry, we calculate it equates to $7 per resident per day,’’ it says, adding the listed operators’ higher ACFI funding implies greater cuts.

The health mandarins ruled the fees as not permissible because they do not provide a “direct benefit” to the resident; nor are they part of the “normal operation” of an aged-care home.

According to Macquarie, the recently introduced fees ranged from $15 per resident per day for Japara, $16 for Regis and $18 for Estia. That, indeed, amounts to a costly lick of paint.

The operators have been left to attempt other mitigations such as boosting the value of the refundable accommodation deposit, or daily accommodation payment.

The RAD in effect is an interest-free loan to the operator over the period of the tenancy.

Maybe the operators can also jag an extra dollar or two to by increasing the fees on add-on services, although there’s also a stricter onus to itemise such costs.

Macquarie believes boosting RAD and DAP values would be hard to achieve “without adversely impacting group occupancy’’.

The firm reckons that even with cost saving initiatives and room optimisation, the companies will only be able to offset 30-36 per cent of the impact.

Shares in the aged-care troika were hammered between 17 per cent and 23 per cent, although these losses were tempered as the week wore on.

Time To Recover?

The ACFI reforms are effective next January and in the interim it’s possible the government will offer a compromise on the department’s “non-binding” advice.

The industry body is lobbying furiously and the government does not need to be reminded who older Australians tend to vote for (hint: it’s not Labor or the Greens).

UBS sees capital charges as part of a “jigsaw” of charges pondered by the sector. “Ultimately we see market dynamics as playing a role in offsetting the ACFI cuts,’’ the firm says.

The firm adds that despite the austerity measures, residential aged-care funding has risen an average 19 per cent per annum. “If history is any guide, government estimates for any given year will not be the final numbers.’’

Arguably the share sell-downs compensates for earnings pain, which becomes progressively acute up to 2019-20 as more residents are unfavourably rerated.

Given the uncertainties, we suggest alternative listed exposures to tap the still-appealing ageing demographic investment theme.

Examples are the affordable retirement village operators Ingenia Communities (INA), Aspen Group (APZ), Gateway Lifestyle (GTY) and Eureka Group (EGH).

Sigma shows how to handle healthcare hiccups

The aged-care imbroglio highlights the wider dangers of listed entities that depend on the public purse, especially in the health space.

Sonic Healthcare (SHL) and Primary Health (PRY) receive regular haircuts because of pathology and Medicare cuts.

The prescription drug wholesalers have long had to make do with less, given the rolling cuts to the Pharmaceutical Benefits Scheme and the subsidies paid to them to ensure all scheduled drugs are available nationally.

The funding regime is determined by the Community Pharmacy Agreement, which was renewed last year for five years with targeted net savings of $3.7 billion over this period.

At least the drug distributors know what to expect and have restructured their business models accordingly.

Take wholesaler and chemist “banner” group Sigma Pharmaceuticals (SIP, $1.37), which on Thursday reported better-than-expected 14.5 per cent half-year profit increase to $31.7m.

While Sigma benefited from the addition of new hepatitis C drugs on to the PBS, half of the revenue increase (up 28 per cent to $2.15bn) derived from non-PBS drugs.

Sigma has a 29 per cent share of the $14.5bn drug wholesaling market and commands 20 per cent of the chemist market through brands including Amcal, PharmaSave and Guardian.

Further scope for reinvention aside, the stocks looks only fair value after its 19 per cent post-results romp.