Aged care under royal pressure

The Federal Government is looking to pull back on spending, claiming it will not be able to afford this level of growth in the future. This has affected the valuations of the corporate players in the sector – even before the royal commission into the aged care sector was announced earlier this month.

"It is difficult to tell what providers may receive the largest dressing down in the commission and what that will mean for confidence levels."

As anyone with experience of the financial services royal commission will bet, there is a good chance that this new commission will look into stories about the mistreatment of clients and poor management. This will affect the reputations of the companies in the sector, when the sector is dependent on clients and their families being able to trust providers to do one of the most personal (and difficult to track) jobs – looking after older Australians. It is difficult to tell what providers may receive the largest dressing down in the commission and what that will mean for confidence levels (hence why all the major players were hit after the commission’s announcement).

Over the longer run – no matter the outcome from the royal commission - we will see the government refusing to increase what it pays the sector to the same extent as it has had in the past. In such an environment it is difficult to see how the sector earns a positive return, particularly when there will be pressure to increase staffing levels and improve facilities.

However, the royal commission may find that funding has to be increased to deal with the increased demand for beds as the baby boomers enter their 80s. If that is the outcome that happens, then it actually will be positive for the industry. But look at what the insiders are doing. In the past 12 to 24 months Regis, Japara and Estia’s acquisitions have been diversifying them away from aged care into retirement villages. This reduces their risk in the midst of aged care funding changes, but they have had to pay top dollar for these retirement village development opportunities as house prices in Sydney and Melbourne peak.

Is there a buying opportunity in the aged care space? Yes, potentially, over the longer term. But the fact is that the underlying fundamentals of the sector will not continue to grow to the same extent as they have, as the government pulls in the reins.

Uday Cheruvu

Portfolio Manager, PM Capital Australian Companies Fund.