Apr 12, 2023

Experts believe aged care sector’s ripe for stock market growth

Experts believe aged care sector’s ripe for stock market growth

There’s growing belief that the aged care sector is ready for stock market growth in what could be a defining year for publicly listed providers, while a proposed merger of two leading providers could add even more fuel to the fire.

Regis and Estia Health are two of the strongest performing aged care providers, and as two Australian Stock Exchange (ASX) listed providers, The Australian Financial Review said there’s a consensus among many shareholders that a combined front could be the best outcome for all.

Regal Funds Management is one of those who believe the two organisations should combine to create a company with over 135 homes and more than 13,500 beds across Australia, plus $1.4 billion in annual revenue.

“It makes a lot of sense for these two companies to come together and be like Ramsay Health Care is in private hospitals, be the dominant player,” Regal Chief Investment Officer, Philip King, told AFR.

“We have been buying shares in both companies.”

Estia Health is no stranger to mergers – it’s the national end product of a three-way merger between former providers Lasting Changes, Cook Care and Padman Health Care. 

But the difficulty lies in the practicality of a merger, especially when there typically needs to be a dominant force. Estia Health and Regis operate on similar levels and that equality means neither would want to give up too much.

Chanticleer columnist, Anthony Macdonald, also said it would be tough to bring together two organisations with varying approaches to aged care. 

“There would be a lot of baggage to take into any talks. Estia and Regis may operate in the same industry, but they’re quite different in their approach and came about in different ways,” he said

“Of course the alternative is one of the private equity firms could do the hard work and mash the two together. However, that would involve paying a couple of hefty premiums and may make it hard to compete with not-for-profit operators that have a significant tax advantage.”

Although a merger of the two organisations may not be feasible in the short term, the conversation does nothing to dampen the increased interest by shareholders.

After Canadian firm, Bain Capital, made a $775 million bid to acquire Estia Health in March, their share prices soared by 33 cents in the past month. The foreign investor valued each share at $3, $1 more than the price Seven Group offloaded its 10% stake for in January.

Although Bain Capital’s bid was not successful in the end, it leaves the door open for other investors. 

Mr Macdonald believes aged care reforms provide plenty of change on the horizon even if investors are unsure about the exact outcomes yet.

“A new star rating system has been in effect since December, grading each aged care home based… while there’s also mandatory direct care minutes to be rolled out from October,” he said.

“There’s also a new funding model, the Australian National Aged Care Classification (AN-ACC), that tries to match resident needs with their cost of care. Macquarie’s equities research analysts reckon it could see funding across the sector worth $225 per bed day, while it was $207 under the former model as at last July.

“Investors and analysts are trying to work out what it all means. There’s likely increased costs and care requirements, but more funding and rebounding occupancy. 

“The long-term story – Australia will be short of beds thanks to the swelling population of residents aged 75 and over – remains intact.”

But it’s not all bad news as there is current interest after a few years in the stockmarket wilderness for the aged care sector, and Mr Macdonald said some fund managers with a “darkest before dawn approach” are already getting in early to buy stocks in the likes of Estia Health.

More international investors could be on the way as well, with Bain Capital’s unsuccessful bid unlikely to dampen global interest.

HelloCare reached out to Estia Health and Regis but both providers were unable to comment in time for publication.

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  1. Here we go again with the investors trying to back the aged growth story. MacQuarie did it years ago and backed out again. These investment “experts” have no concept of the high degree of sovereign risk that will always dampen returns and especially now as the NDIS runs rampantly out of control and we’ve decided that nuclear subs are the complete answer for Australia’s defence. Yes the new funding mechanism has increased the average daily rate but there is a substantial cost not only in people that goes with that and the two will not equate to a net gain for the industry. History is clear on that.

    The Department and Government however will do what they always do and encourage amalgamation and use the Estia – Regis story as “evidence” that there is money to be made in the industry and that all the other “evidence” [the real numers and stats] is meaningless. This expert investor interest always blows up in the face of the rest of the industry. As large as the two listed companies are, they are still a small proportion of the industry and not reflective of the variety of services across the country.

    At the end of the day we’re still flogging a government designed program that effectively has not changed other than a “spruce up” on the fringes. Innovation is stifled by regulation but the answer for the future is absolutely not a continuation of the past.

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