Company Overview: Japara Healthcare Limited (ASX: JHC) operates and develops residential aged care homes to deliver a better standard of residential living for elderly Australians. The company operates approximately 180 independent living units and apartments across five retirement villages in Australia. The company’s business model primarily facilitates ‘ageing-inplace’ by servicing a complete range of resident care needs. Further, it specialises in providing high acuity care to residents living with dementia. The company remains on track to invest in its existing homes and technology along with carrying out significant refurbishment programs to improve their facility, environment, and connection with the community.


JHC Details

  

JHC Rides on Development Expansion & Increased Investments: Australia’s top aged care provider, Japara Healthcare Limited (ASX: JHC) is engaged in owning, operating, and developing residential aged care homes. It provides elderly care services to over 4,000 residents across ~50 homes in Victoria, Queensland, South Australia, New South Wales, and Tasmania through its dedicated team of ~5,800 nurses, carers, and other support staff. The company has a diversified growth strategy that incorporates a wide range of development programs to address the rising community need for residential aged care. The development program is designed to offer approximately 300 places per annum, with more than 1,100 net new places expected to be opened by the end of FY2022.
 
In FY19, the company’s total revenue went up 7.1% from the prior corresponding, primarily on the back of continuous contributions from greenfield and brownfield developments. Also, a higher contribution from the Riviera Health portfolio which the company acquired in April 2018 along with the Federal Government’s increase in subsidy were key drivers in FY19. The overall increase in revenue resulted from an expansion in the number of operational places through strategic acquisitions of existing homes, advancement of new homes along with the construction of extensions to existing homes. Average occupancy for FY2019 stood at 93%.
 
Going forward, the company continues to improve its strategy and focus on occupancy, which would become more essential in a situation of intensified competition and heightened customer expectations. The company continues to focus on delivering additional capacity to meet the growing demand for residential aged care facilities. For this purpose, it remains committed to new quality standards, with increased investment in resident amenity and improvements in quality and safety systems. The group also intends to begin pilots of a new IT-based clinical and medical management system for implementation across all homes. The move is likely to expand its portfolio and improve financial performance in the coming years.
 
Over a period of 4 years starting from 2015 to 2019, the company has reported top-line CAGR growth of 9.2% with revenue in 2015 and 2019, amounting to $281.2 million and $399.8 million, respectively. In 1HFY20, total operational places stood at 4,385, up from the pcp figure of 4,125 and the company expects to increase this number to 5,366 by June 2022. The company has a history of delivering sustained shareholder returns. JHC declared an interim dividend of 2 cents per share in 1HFY20 (50% franked).
 

Operational Places & Total Residents Highlight (Source: Company Reports)
 
1HFY20 for the Period Ended 31 December 2019: During the period, revenue stood at ~$212.6 million, increasing 9.9% year over year. In 1HFY20, the company retained a 100% accreditation record along with 20 aged care quality and safety commission visits. EBITDA for the year stood at $24.3 million, up 10% year over year, largely due to additional residents in its new and extended homes and from portfolio management of real estate assets. Notably, new developments and homes were renovated during the period, underpinned by strong greenfield and brownfield developments. In 1HFY20, net profit after tax (NPAT) stood at $5.4 million, down 28% year over year, due to development activities and higher depreciation and net interest expense. The company continued to develop more than 200 net new places, which includes one greenfield and three brownfield developments.
 

FY19 Results (Source: Company Reports)
 
Key Operational Highlights: Total number of operational homes in 1HFY20 stood at 50 homes, up from 49 homes in 1HFY19. Total operational places in 1HFY20 stood at 4,385, up from 4,125 in 1HFY19. Average occupancy in 1HFY20 stood at 92.6%. Average revenue per occupied bed day in 1HFY20 came in at $284.4, up from $276.6 in 1HFY19. Notably, average incoming bed contract price increased from $355.7K in 1HFY19 to $382.7K. Since 31 December 2019, the occupancy has increased beyond the operational place from new developments, which currently stands at 93%. The company witnessed higher Government revenue growth in 1HFY20, underpinned by COPE and increased accommodation supplement income. 
 

1HFY20 Key Operational Highlights (Source: Company Reports)
 
Balance Sheet Position: At the end of the 1HFY20, the company’s cash balance stood at $50.5 million.  At the end of 31 December 2019, the company had a net bank debt of $185.3 million, out of which $31.5 million is reflected as core net debt and $153.8 million is development debt. The company expects near term developments to provide ~$135m-145m in RAD inflows for reducing debt and funding growth initiatives. Net Refundable Accommodation Deposit (RAD) and Independent Living Units (ILU) cash inflows came in at $33.4 million in 1HFY20, as compared to $28.9 million in 1HFY19, due to increased place numbers.
 

Net Debt Movement (Source: Thomson Reuters)
 
Cash Flow Position: Operating cash inflow in 1HFY20 came in at $59.7 million, as compared to $59.4 million in 1HFY19. Net cash outflow from investing activities in 1HFY20 came in at $55.6 million as compared to an outflow of $66.5 million in 1HFY19. Net cash inflow from financing activity in 1HFY20 came in at ~$14.9 million.
 

Cash Flow Details (Source: Company Reports)

Key Developments: In 1HFY20, the company made an outstanding progress on the development program, with the completion and opening of its latest greenfield development, Robina Rise in 106 places. Further, three greenfield developments are presently under construction at Mt Waverley, Newport and Belrose. The company also completed the development of 723 new places, which is expected to deliver further net RAD inflows of $135m- $145m. The company also completed the Brownfield extensions of 3 new places at Kingston Gardens, Brighton-Le-Sands and Mirboo North.  With the above scenario in place, the company is confident about retaining its existing customer base and expects to maintain dominant growth momentum in the long run.
 
The company continues with ongoing portfolio management of real estate assets and recently entered a contract with YWC Pty Ltd, to sell and leaseback the underlying real estate of the Japara Springvale residential aged care home. The sale proceeds are ~$13.3 million net of costs and reflect a yield of 5.6%. The company has also entered a contract with Multicultural Aged Care Services Geelong, Inc., to sell a vacant site at Roslyn Road, Highton, Victoria for a consideration of $3.6 million net of costs.
 
Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 43.76% of the total shareholding.

Top Ten Shareholders (Source: Refinitiv, Thomson Reuters)
 
Key Metrics: In 1HFY20, the company had a net margin of 2.9%. The company’s debt-to-equity multiple in 1HFY20 stood at 0.50x and ROE stood at ~1%.

Key Metrics (Source: Refinitiv, Thomson Reuters)
 
Outlook: With rising uncertainty due to COVID-19 outbreak on the aged care sector and the instability in financial markets, the company found it prudent to withdraw its FY20 outlook. However, the company is closely monitoring the situation and is taking necessary steps for the safety and well-being of residents and staff. Further, the company focuses on expanding its portfolio and continues to take necessary measures to improve the quality of its existing homes. In doing so, the company has capitalized in new technology to boost care and business operations. The company has been investing in new technology and service enhancement. Further, the company’s focus on enhancing clinical governance, quality management and resident care systems by construction of new homes and refurbishment of existing properties to expand bed capacity, will drive future earnings.
 
Moreover, the company’s recently completed developments are expected to diminish industry headwinds. The company remains on track to accommodate new quality standards, with increased investment in resident amenity along with improvements in quality and safety systems. It continues to improve its strategy and focus related to occupancy, which would become even more vital in an environment of increased competition. The company’s balanced approach with respect to growth coupled with the expansion of its existing portfolio reflects its progress towards sustainable future growth.


Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)
 
Valuation Methodology: Price to Cash Flow Multiple Based Relative Valuation Approach (Illustrative)
 

Price to Cash Flow Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
 
Note: All forecasted figures have been taken from Thomson Reuters 

Stock Recommendation: The stock of the company has corrected ~48.21% in the last six months. However, it has run up ~18.37% in the last one-month period. At the CMP of $0.59, the stock of the company has an annual dividend yield of 9.22%. The company has a market capitalisation of ~$155 million and ~267.25 million outstanding shares. Currently, the stock is trading close to its 52-week low level of $0.375, proffering an opportunity for share accumulation. The company made substantial investments in infrastructure, people, and technology. JHC has continued to invest in greenfield and brownfield developments to boost future earnings growth while the existing portfolio also continues to provide mature home RAD inflows. Considering the recent developments, long-term growth potential, and current trading level, we have valued the stock using P/CF multiple based illustrative relative valuation method and arrived at a target price of lower double-digit growth (in percentage terms). For the purpose, we have considered Regis Healthcare Ltd (ASX: REG), Estia Health Ltd (ASX: EHE), and Virtus Health Ltd (ASX: VRT) as peer group which comes under the healthcare facilities & services category. Hence, we recommend a “Buy” rating on the stock at the current market price of $0.59, up 1.724% on 13 May 2020.
 
 
 
JHC Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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