Japara Healthcare Limited (ASX: JHC)
JHC Details
Lowered EBITDA Guidance: Japara Healthcare Limited came under slight pressure post a review of Capital Refurbishment Deduction (“CRD”) that the group introduced in 2015 after an approval from its solicitor and support from a senior barrister’s opinion. Based on that advice, Japara had earlier concluded that its CRD was supported by a relevant legislation and provided a direct benefit to residents. Things were in place until recently when Japara noted that in a recent Federal Court finding the asset replacement charge implemented by Regis Healthcare was not consistent with the relevant legislation. As a result, Japara decided to refund all CRDs that were paid by residents including the accrued interest. Revenue derived from its CRDs amounted to $1.84 million in 8 months (ending on 28 February 2018) against $2.82 million in prior financial year. JHC had also ceased deducting CRD’s for new residents from 1 September 2017 and has decided to suspend the monthly deductions for existing residents with effect from 1 March 2018. After refunding the CRD, the Group anticipates FY18 EBITDA to be between 14-19% below FY17 result. On the other hand, occupancy during the first half of 2018 was impacted by unusually severe influenza outbreaks, both in terms of duration and by the number of residents affected. Nonetheless, EBITDA is expected to increase in FY19 as the initiatives are expected to gain further traction, with occupancy normalising to some extent while ACFI indexation recommences. We believe that the stock (which was down 4.6% on March 09, 2018) needs to be watched for any improvements, and give an “Expensive” recommendation at the current market price of $1.87
Operational Performance (Source: Company Reports)
Regis Healthcare Limited (ASX: REG)
REG Details
Lower occupancy impacted the net RAD cash flow: The Federal Court of Australia delivered its judgement in respect of Regis’ application for a declaration to obtain a clarity in relation to whether Regis Asset Replacement Charge (ARC) is consistent with the Aged Care Act 1997. The Court decided that the ARC was not consistent with the Act. Post judgement, Regis ceased charging the ARC from 2 March 2018 and has now commenced a process to pay refund (with accrued interest) to all residents who had previously paid the ARC. Regis has made a provision in its FY17 financial accounts and reduced the profits by an equal amount of ARC which was recognised as revenue and as a result it will not impact 2018’s NPAT and EBITDA. The Group released its 1HFY18 results and the revenue increased by 4% as compared to 1HFY17 while EBITDA was in line with 1HFY17. Earnings from new developments were in line with the expectations. However, debt was up driven by Presbyterian Care, TAS acquisition and by the development pipeline which has five Facilities and is currently under construction. It is anticipated that interest expense will increase as the investment in development will increase. Net RAD cashflow for FY18 is expected to exceed FY17’s cashflow. The stock price rose by 19.6% in the past six months but declined by 1.98% in last five days. Looking at the recent headwind and uncertainty in terms of regulatory measures, we believe that the stock is “Expensive” at the current market price of $3.95
EBITDA Performance (Source: Company Reports)
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