Profit from ageing population
What the share price charts say about Japara, Regis, Estia and Invocare.
Aged care does not sound like the most exciting investment theme, but you cannot argue with the facts. Australia's population is ageing at an increasing rate, with the number of over-65s forecast to triple by 2050. As the baby boomers enter their twilight years and the population continues to rise, the aged-care industry will need to grow substantially to meet the demand.
It is being called "a tsunami of ageing" and that is not far from the truth. It is certainly a sea change and has far-reaching economic implications because of lower tax receipts and increased healthcare spending, which will be a strain on the public purse for many years to come. According to the Department of Social Services, more than one million Australians already access aged-care services, producing annual revenue of $17 billion, and it's growing at 5 per cent a year.
There are three fundamental reasons for investors to like the aged-care sector:
1. Demographic tailwinds
By 2050 the number of people aged over 65 will grow from 13 per cent of the population to 25 per cent. Meanwhile, total government health spending is forecast to increase from a quarter of the national budget to half, while government spending on aged care in the form of accommodation and other supplements is projected to increase from $9 billion annually now to $66 billion in 2050.
Whatever happens, and whoever ends up paying, the private sector is going to have to supply a lot more beds and health services in the future, and those best placed to capitalise on this growth are the newly listed aged-care providers.
2. Government inducements
To take the pressure off taxpayers, Canberra will need to undertake a number of initiatives, hand-in-hand with aged-care providers. The Federal Government already provides a reliable stream of rebates but policy decisions will require more imaginative thinking in the years ahead, given the size of the fiscal challenge.
One good example is the introduction of so-called accommodation bonds, which let the aged sell their home and give part of the proceeds to an aged-care provider, which then returns the remainder to the estate when the person dies. There are bound to be more industry inducements and tax incentives in the years ahead.
3. Major consolidation is on the cards - operators with economies of scale and access to capital will grow strongly
There have been dramatic consolidations in other health sectors, such as non-government hospitals, radiology and pathology, in recent years, and aged care is poised to follow.
Industry leaders believe more than a quarter of Australia's 1,200 aged-care operators will be swallowed up within three years, with around 10 corporate players poised to control half the market.
Currently, the biggest operator is the unlisted British United Provident Association (BUPA), which has 3 per cent market share, while new listing Regis has 2.5 per cent, and Japara Healthcare and Estia Health both have less than 2 per cent. The publicly traded operators are best positioned to increase their market share via acquisitions because they have access to cheaper capital (equity), as well as greater economies of scale.
Also, because the industry receives a large portion of its revenues from government, any push to get wealthier aged-care residents to pay more of their bill (via accommodation bonds, for instance) makes it harder for smaller nursing homes with poorer facilities and fewer residents to meet that new demand. The move to a user-pays principle is a government priority, given fiscal constraints.
"Even without doing your homework on a particular acquisition, it looks pretty enticing," says Professor John Kelly, CEO of Aged and Community Services Australia, which represents 900 church and charity-based operators. "You've got a regular government contribution to the sector, you've got an increasing demographic and they've either got to get community care or residential care, one way or the other. There's cash-flow certainty."
A word of warning
The "grey dollar trade" is a long-term story and could encounter short-term headwinds. Also, both price and time have an uncanny ability to shake out the disbelievers before the big moves occur in "hot" investment themes, as anyone who invested in tech stocks in 2001 will recall: Apple and Google were not born as giants overnight and a large number of young pretenders vanished during the frontier days of the internet. To quote a popular Wall Street adage: "Knowledge is one thing, timing is everything."
So focus on price, despite the positive long-term fundamental drivers. Here is a technical analysis of four stocks best positioned to capitalise on the Australian "grey dollar" investment theme.
(Editor's note: Do not read the following ideas as stock recommendations. Do further research of your own or talk to a financial adviser before acting on themes in this article.)
1. Japara Healthcare (JHC)
Japara became Australia's first listed aged-care operator in April 2014 and operates 35 aged-care facilities and four retirement complexes across the country, accommodating about 2,800 residents.
Japara initially opened well above the IPO price and then successfully tested it. There appears to be good support there and recent price action is very encouraging. A weekly close above the bull line changes the game. I'm cautiously bullish.
2. Regis Health (REG)
Macquarie Group formed this business from several aged-care operators in 2007, growing it from 3,600 beds to 4,719 and 47 facilities across Australia. Macquarie believes the company can double its bed count over the next five years as the industry consolidates and the baby boomers enter their twilight years.
Regis's aged-care facilities include a broad suite of specialist services, including respite, dementia-specific care and palliative care.
Regis has been acting well on the chart since it listed in October, nicely above both the IPO price and the opening listed price - both positive signs. The recent breakout above the opening range is strong and higher prices are likely. The chart pattern looks bullish.
3. Estia Health (EHE)
Estia Health runs 39 aged-care facilities and has 3,900 beds. The company was formed from the merger of three residential aged-care businesses and listed in December 2014. It experienced a poor sharemarket debut, down 17.6 per cent, making it the worst-performed float above $200 million of 2014.
It opened well below the IPO price of $5.75; a bullish pop upon listing is always better than a bearish one. Nevertheless, the price found solid support at $4.50, and Estia has since rallied beyond the IPO issue price. The chart pattern looks bullish.
4. Invocare (IVC)
You could call Invocare the ultimate defensive stock, being Australia's biggest funeral service provider with a third of the total market share. Its funeral home brands include Blackwell, Guardian, George Hartnett, Le Pine and Purslowe. It also owns 14 cemeteries and two crematoriums.
Since listing in 2004, Invocare has made 15 acquisitions, which have provided around half of its 10 per cent annual revenue growth since 2005. It is well placed to benefit from Australia's ageing population over the longer term: annual mortality rates are forecast to increase by between 1 per cent and 2 per cent annually.
The company also has a 34 per cent shareholding in the online memorial website, HeavenAddress, which attracts about one-third of all online funeral traffic in Australia, New Zealand and Singapore, and generates 1.2 million customer visits annually. Plans are under way to expand the service in the UK.
Invocare is currently trading at around 30-times earnings. It is a company to keep on the watchlist when share prices fluctuate - another certainty of life.
On the chart, Invocare is in a strong long-term uptrend. There have been two major pullbacks, in 2008 (GFC) and 2013/14 (due to a short-term drop in death rate), which have been buying opportunities. The recent breakout above $12 should carry prices to at least $14 on my analysis; a drop below $12 would target prices around $10.
About the author
Richard Lie is the founder of Crusader Capital Management and the stock advisory service and popular Stockradar trading blog. He focuses exclusively on price analysis to make decisions in the sharemarket. He is licensed by ASIC.
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