JHC Details

Fiscal year of 2016 performance highlights:Japara Healthcare Ltd (ASX: JHC) has reported a 16.4% growth in the revenue to $327.3 million in FY 16 and 5.6% growth in the net profit after tax to $30.4 million. In addition, JHC’s underlying occupancy is at 94.4%, excluding the impact of brownfields while the total operating places is up 15.9% to 3,717. JHC’s EBITDA for FY 16 reflects the impact of the removal of the Payroll Tax. JHC would continue to maintain a conservative balance sheet. JHC’s net bank debt is $34.9 million as on 30^th June 2016, and the $160.5 million amount has been committed towards undrawn debt facilities to support the greenfield and brownfield development program. JHC has acquired Profke which is integrated in the FY 16 results and on track to deliver over 900 additional places by the end of FY19. Profke acquisition has led the company to enter into the Queensland market and expansion into New South Wales. JHC has completed 2 brownfield projects in FY16, adding 54 places, while secured 4 new greenfield sites and 5 projects which are currently under construction for completion in FY17. Additionally, FY17 EBITDA is expected to grow at a similar rate to FY16. The considerations include the full year contribution from acquisitions and the partial FY17 contribution from the brownfield and greenfield developments, increasing in FY18 and beyond. JHC is going to transition to post-reform income (e.g., Daily Accommodation Payments, Additional Services, Significant Refurbishment) from pre-reform income (e.g., bond retention and accommodation charges).
 

FY16 Financial Performance (Source: Company Reports)
 
Impact from the scrutiny of fees by the government: A lot of turbulence has been seen in the aged care sector after the Australian Government came out with the clarification on the fees which the aged care operators such as JHC could charge their residents. The government considers that additional service fees like ‘capital refurbishment fees’, ‘asset replacement contributions’ and similar fees would not be supported by the legislation as the fee does not provide a direct benefit to the individual or the resident. The companies cannot take up or make use of the services, or where the activities or services are subject to the fee as part of the normal operation of an aged care home. As an effect, JHC stock fell 22.2% on 5^th September 2016. Meanwhile, the company reported notice of the change of director’s interests for the non-executive directors such as David Blight’s indirect interest related to Netwealth Investments Limited (Wrap Services A/C) for Blight Superannuation Fund (a trustee & beneficiary).
 
Stock performance: JHC is expecting low single-digit ACFI growth in FY17 due to further investments in capability to support the business’ development and growth strategy. Meanwhile, JHC stock has fallen 35.2% in the last six months as on 2^nd September, 2016, and we believe the pressure in the stock would continue in the coming months. The stock is trading at a higher P/E. Moreover, the clarification by the Australian Government regarding the fees could have a negative effect on the margins of the company. The development pipeline still looks exciting but tighter government funding is letting uncertainty prevail for the stock. Based on the foregoing, we give a “Sell” recommendation on the stock at the current price of $1.74
 

JHC Daily Chart (Source: Thomson Reuters)

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