Which aged care stock to buy?

Japara Healthcare Ltd


JHC Details

Strong operational performance: Japara Healthcare Ltd (ASX: JHC) reported for the Australian Government 2015 Aged Care Approvals Round’s (ACAR) outcome regarding allocation of 313 new residential aged care places under the 2015 process to JHC. This with 472 allocations from the previous ACAR round and 204 non-operational licences already held, JHC now holds 989 resident places under its greenfield and brownfield development program. The company also reported strong result for first half of 2016 with revenue rising by 13.4% to $155.9 million and EBITDA by 10.6% to $28.2 million. The company’s focus on high quality care and service delivery drove its performance during the period. Accordingly, Japara is also keen on making strategic investment in new capacities to leverage the rising demand from ageing population. The company is currently expanding its capacity by over 900 new beds, which is strongly supported by healthy balance sheet with net RAD inflow of $30.1 million while the net bank debt is just $1 million. Moreover, age-care industry is also supported by government with confirmed commitment to sustainable aged care funding in 2016-17. The company recently acquired Profke with four facilities and 587 places in QLD and NSW for $77million. For second half of FY16, the management expects strong performance to continue while Profke would contribute over $ 4 million to EBITDA for FY16. Based on the foregoing, we issue a “Buy” rating on this dividend yield stock at the current market price of $2.74
 

JHC Daily Chart (Source: Thomson Reuters)
 
Aveo Group


AOG Details

Strengthening leadership position via acquisitions: Aveo Group (ASX: AOG) operates in the Australian retirement community through 95 retirement communities and is running about 17,000 homes. The Group is focusing on expanding further capacity and have confirmed its commitment to acquire Freedom Aged Care, which has 15 aged care communities with 1004 units and pipeline of 533. The group is likely to offer $215.5 million to be paid as shares and cash while the acquisition is expected to be EPS accretive from FY17.
 

Strategy impact on retirement profits (Source: Company reports)
 
Meanwhile, AOG expects FY16 underlying profit after tax of over $ 80 million, return of retirement assets of 6%-6.5% and dividend of 8 cents per share. In April, the group increased its interest in Retirement Villages Group fund to 73%, wherein the portfolio consists of over 3400 units in 28 retirement villages. The acquisitions are 1.5% EPS accretive for FY17 and FY18, and accordingly the group upgraded its EPS growth guidance to 7.5% in FY17 and FY18. We recommend a “Hold” on the stock at the current market price of $3.34
 

AOG Daily Chart (Source: Thomson Reuters)
 
Regis Healthcare Ltd
 

REG Details

Asset acquisition:Regis Healthcare Ltd (ASX: REG) is acquiring assets from Masonic Care Queensland for an investment of $163 million. This acquisition will expand Regis capacity by 14% with 711 operational places and RAD Pool of $50.1 million. The transaction would complete by June 01, 2016 and would be EPS accretive in FY17. On the other hand, the group reported that the acquisition cost would impact its FY16 earning. Accordingly, REG stock fell over 4.83% in the last three months (as of May 27, 2016).
 

Aged care portfolio (Source: Company Reports)
 
REG expects the acquisition benefit to flow in FY17 and would impact EBITDA in the range of $10-$12 million in FY17 and net profit by circa $1-$2 million. The company plans capital expenditure of $115 -$135 million in FY17.  The company has guided FY16 EBITDA in the range of $87-$92 million while NPAT of $45 -$47 million. Following the execution of existing development pipeline, Regis will have a circa of 6,900 operational places by the end of FY19. Trading at higher P/E, we believe that the stock is “Expensive” at the current market price of $4.93
 

REG Daily Chart (Source: Thomson Reuters)
 
Estia Health Ltd


EHE Details

Low margin business acquisition to impact bottom line growth: Estia Health Ltd (ASX: EHE) reported a 16% rise in net profit to $ 23 million for the first six months of FY16 while revenue growth has been strong at 43% to $196 million. The growth rate of earnings is slower than its revenues on account of Estia’s strategy of acquiring relatively low-margin businesses. The company recently purchased aged care businesses of Padman, Cookcare and Kennedy. The group has funded the expansion with debt, which has adverse impact on bottom line due to rising finance costs. Additionally, the group is highly exposed to potential regulatory change. EHE has guided NPAT growth of 25% in FY16. It has paid interim dividend of 12.8 cents per share, noting a rise of 16% compared to previous corresponding period. The stock has generated negative returns of 24.61% in last six months (as of May 27, 2016) and is still trading at unreasonable P/E. We believe that the stock is overvalued at the current market price of $5.82
 

EHE Daily Chart (Source: Thomson Reuters)

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