This year, the Australian economy has been rebalancing itself from the resources boom and mining-led growth to stronger growth in other sectors. The aged care sector has been thought to play an important role in this transition of the Australian economy as the sector produces output, employs labor and pays wages, and generates returns to capital. However, recent developments in the sector seem to uncover an alternate view.
 
Rapidly growing aging population generates demand: As per the Treasury’s 2015 Intergenerational Report, the number of Australians aged 65 years and over was expected to more than double in the next 40 years, therefore the same was said to increase from around 3.6 million in 2014-15 to 8.9 million in 2054-55. For this, the Aged Care Financing Authority (ACFA) had projected that 76,000 new residential aged care places are needed by 2023-24 to meet the growing demand. Aged care industry within the Australian economy has been expected to grow in the future, and accordingly, the demand for public funding to support access to aged care services has been expected to grow fast. The 2016-17 Commonwealth Budget has committed $17.8 billion to support aged care services during FY 2016-17. The residential aged care sector, as of now, is associated with an annual revenue of about $15.8 billion in which $10.4 billion comes from Government funding. However, the aged care sector is highly fragmented as more than 1,000 providers operate 2,600 facilities nationally. Therefore, the opportunities for consolidation look high.
 
Scenario for Australian players: The growing aging population in Australia, in a way, has been expected to provide opportunity for players like Japara Healthcare Ltd and Estia Health Ltd. Japara had delivered a double-digit growth in revenue and EBITDA for FY16 but recently undertook a turbulent ride when the sector faced volatility in terms of funding cuts. There are several reviews underway that Japara is expecting to take shape in the future and one of the areas of focus, at the moment, is the Aged Care Funding Instrument (or ACFI). The Government uses the tool, ACFI, to determine how much funding is needed to meet each resident’s care needs.

Government’s review into the aged care reforms: On the other, the Aged Care Legislated Review has been seeking inputs on matters relating to unmet demand, aged care pricing, access to services, and the like. The outcome is not expected to be a highly encouraging one as many seniors are still unable to leverage from the aged-care facilities. It has also been highlighted that various reforms including sustainable funding and expanded workforce capacity have not been delivered appropriately. At the same time, the government aims to work with the aged care sector on ways of adjusting the ACFI to deliver $1.2 billion in savings over four years. It is worth noting that the Turnbull government’s planned $2 billion in funding cuts had weighed on the ASX listed companies in terms of stock prices and market performance. However, the alteration in the cuts and funding at the back of the latest inputs, has temporarily boosted the stocks to some extent in early December 2016. Although, the sector may have more certainty with the revised package, challenges might still prevail in terms of the quality of care, and the access to care. The sector might take a lot of time on returning to growth owing to continuous pressure from cost and softness in revenues. For instance, Estia stock slipped 6.5% on ASX in last five days (as on December 13, 2016) while it made some capital raising announcements. On the other hand, Japara stock plummeted 29.5% this year to date but corrected 15.4% in last one month (as on December 13, 2016). It might be too early to comment on the prospects given the highly speckled scenario.

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