Aged Care – regulatory environment masks the opportunity

The two listed aged care operators we formally cover – Regis Healthcare (REG) and Japara Healthcare (JHC) – have come under significant selling pressure (fallen over 15%) since the Budget cuts were announced in May. In response to the higher-than-expected increase in residential aged care funding, the government has announced changes that relate to a redesign of the complex health care (CHC) scoring matrix. These changes are estimated by the government to save A$1.2bn, although much of these savings are expected in 2019 (approximately 40%). We expect the aged care operators will be able to partially offset the reduced growth in government payments by charging higher resident fees and increasing accommodation prices. After these changes are implemented, the government forecasts expenditure will grow by 5.1% pa to 2020.