In theory, the aged care sector should be one that looks attractive to investors, with Australia’s ageing demographic makeup a strong tailwind for the aged care industry.
Australia is getting older, faster. According to Lee-Fay Low, Professor in Ageing and Health at the University of Sydney, by 2026, more than 22% of Australians will be aged over 65 — up from 16% in 2020, which was already double the 8.3% at the start of the 1970s. The Australian Bureau of Statistics (ABS) forecasts the number of Australians aged 65-84 to increase from 4 million in 2022 to 6 million by 2030,
And, thanks to compulsory superannuation, this ageing population has greater wealth than previous generations.
Aged care is a service that these people need and are prepared to pay for; and there are more potential customers, every year. But as investors experienced in the sector can attest, these positive fundamentals have all too often been negated by regulatory uncertainty, plus the reliance on government funding for most of the sector – and COVID was a hammer blow.
However, a wind of change has blown through the sector. As law firm Minter Ellison put it in a paper published in June 2024: “The Australian aged care sector has always been underwritten by the Commonwealth Government, which injects funding into the sector through the Australian National Aged Care Classification (AN-ACC) model (which replaced the Aged Care Funding Instrument, or ACFI). Providers in the sector received the overwhelming majority of their revenue from government subsidies; this has been attractive for investors. However, in recent years, the rate of indexation to these subsidies has been frozen or has only increased at a very nominal rate. This combined with other regulatory changes, increasing standards of corporate governance for aged care providers, along with other expensive regulatory changes, have pushed many providers further in the red.”
Minter Ellison says the new government brought in a substantial reform agenda. ln December 2023, the government released an Exposure Draft of a New Aged Care Act, which involves a new regulatory model for the Australian aged care sector. The Exposure Draft set clear expectations from the Australian government of aged care providers, introducing stricter regulations and a sharpened focus on the needs of care recipients. Then, in March 2024, the Aged Care Taskforce – a taskforce commissioned by the Commonwealth Government to advise on aged care funding arrangements – released its final report.
In the report, the taskforce recommended that wealthy older Australians should pay more for aged care services if they could do so: it said there was a strong case to increase co-contributions for people with means, while there will always be some who need more government support.
The Taskforce’s final report did make for some alarming reading: the federal government’s aged care bill in the 2021-22 year was $24.8 billion, $14.6 billion for residential care and the remainder for home care services. By 2032, the residential aged care cost is projected to swell to $41.2 billion. Almost 69% of residential aged care providers lost money in 2021-22, compared with 54% a year previously.
But while the legislative response is pending, there is at least the feeling that a blueprint for the future of Australia’s aged care sector is taking shape, promising greater regulatory clarity for investors.
Adequate staffing – of the right mix of experienced, capable and empathetic people – is still an issue post-COVID, cost-of-living pressures are affecting providers’ wages costs, as they adapt to minimum-care-minute requirements that took effect in October 2023. All providers are facing higher capital expenditure requirements if they want their aged care homes and retirement villages to stay competitive, while continuing to provide high-quality care and maintain regulatory compliance.
It’s a very competitive industry, but there is also the scope for the better-standard providers to push their market leadership position even further; and aged care remains a highly fragmented industry, with significant number of smaller operators in the market, creating growth opportunities for those leaders. Here are two well-positioned stocks that could benefit.
- Regis Healthcare (REG, $4.08)
Market capitalisation: $1.2 billion
12-month total return: 79.1%
Three-year total return: 32% a year
Expected FY25 dividend yield: 2.8%, 50% franked (grossed-up, 3.4%)
Analysts’ consensus price target: $4.65 (Stock Doctor/Refinitiv, six analysts)
Regis Healthcare, which is now Australia’s only pure-play listed local provider, cares for more than 7,600 older Australians through its residential aged care homes, home care service hubs, day therapy and day respite centres and retirement villages. It has one of the largest and most geographically diverse portfolios in the industry, with 68 aged care homes spread across six states and the Northern Territory. Regis owns the freehold of its properties, meaning they have very significant real estate value.
Regis spells out the tailwinds for the sector this way:
- The “baby boomer” generation will demand higher quality and more premium service offerings.
- The average age of people entering residential aged care is 83 (men) and 85 (women).
- There are about 220,000 operational places in Australia at 30 June 2023, with forecast required residential aged care places of over 300,000 by 2030.
- Approximately 25% of current accommodation is no longer fit-for-purpose, with about 135,000 new and refurbished beds required to be built.
- Based on the current cost of development, approximately $50 billion–$70 billion capital will need to be invested to close the gap; 40% of that going to refurbishment of existing stock, and the remainder to accommodate increasing demand.
In the half-year to December 2023, Regis showed its mettle, lifting revenue by 26%, to $480.1 million, and increasing net profit before amortisation of beds more than six-fold, to $16.3 million. A $28.5 million write-down on the value of bed licences net of tax, ahead of the deregulation of bed licences on 1 July 2024, took Regis Healthcare’s net loss after tax to $12.1 million.
This was despite staff expenses rising by 27%, to $366.5 million, on the back of the Fair Work Commission (FWC)’s 15% pay rise for direct care workers, and care minute mandates which necessitated high use of agency staff.
Average occupancy rose 2.5 percentage points, to 93.6%. Strong net operating cash flow of $151.9 million – more than double the figure from December 2022 – helped the business end the half-year with net cash of $16.9 million on the balance sheet, compared to negative net cash (debt) of $67.6 million at December 2022. Investors were rewarded with a 6.28 cents per share (CPS) dividend, returning 100% of NPATA (net profit after tax adjusted) excluding one-off items to shareholders Though down from the 2H23 dividend of 7.48 CPS, the dividend was a significant improvement on prior years.
Improved business performance and occupancy trends, as well as increased funding under the AN-ACC model, will flow into the full-year result. Regis did not give formal guidance for the full-year result, but analysts’ consensus expects the company to rebound to full-year profitability from FY23’s net loss of $28.4 million. According to Stock Doctor/Refinitiv, analysts’ consensus expects net profit of about $34 million in FY24, rising to $44 million in FY25.
Brokers are quite positive on Regis Healthcare: the most bullish is Macquarie, which has a price target on the stock of $5.50, saying that REG is backed by favourable industry fundamentals, and has the balance sheet capacity for acquisitions. There is also a projected grossed-up yield of 3.4% to help the total return picture.
- Summerset Group (SNZ, $10.20)
Market capitalisation: $2.4 billion
12-month total return: 9.6%
Three-year total return: –5.3% a year
Expected FY25 dividend yield: 2.4%, unfranked (grossed-up, 3.4%)
Analysts’ consensus price target: $14.18 (Stock Doctor/Refinitiv, one analysts)
I wrote above that Regis Healthcare is Australia’s only pure-play listed local provider, and that is true; but investors should also take a look at the savvy Kiwi player Summerset Group, which has been dual-listed on the ASX since July 2013.
Following its listing here, Summerset bought its first land in Australia in September 2019, and is building aged-care facilities in Victoria (it has also bought sites in Queensland.) Summerset’s first Australian residents moved into their new village at Cranbourne North in Victoria in March 2024.
Through its aged-care facilities, Summerset offers a “continuum of care” model in which residents can enter a village in an independent unit and potentially transfer into higher needs healthcare units in the same village if required.
The company currently provides 6,087 retirement units across New Zealand and Australia, of which 1,284 units are higher-needs care units. In total, more than 8,000 residents live in Summerset villages and Summerset employs more than 2,800 people.
New Zealand has similar demographic tailwinds to Australia: over the next 25 years, the New Zealand population aged over 75 years is forecast to double, from 400,000 people to 800,000, in round numbers, and to almost triple, to 1.2 million people, in the next 50 years.
In 2023 (Summerset uses the calendar year as its financial year), revenue rose 14%, to NZ$272.2 million; operating expenses increased by 17%, to NZ$263.8 million; and underlying net profit lifted 11%, to NZ$190.3 million. The company paid a dividend of 24.5 New Zealand cents a share for the year, up 9.9% on 2022.
Summerset has construction in progress at 17 sites throughout New Zealand and Australia and continues to be on track to deliver approximately 675-725 homes in 2024; the company expects it will deliver closer to the lower end of that range. This includes Stage 1 of its St John’s village in Auckland, the company’s first multi-level village In July, Summerset said it expects to deliver underlying profit of between NZ$87 million and NZ$90 million for the six months to June 30: the lower end of the estimate would come in just under the underlying profit of NZ$87.2 million it reported for the same period last year. Summerset has not given full-year earnings guidance.
The company has 38 villages completed or in development around New Zealand, and in addition, it has six proposed sites at Half Moon Bay (Auckland), Rotorua (Bay of Plenty), Palmerston North (Manawatu), Masterton (Wairarapa), Rolleston (Christchurch), and Mosgiel (Dunedin). It also has two villages in development (Cranbourne North and Chirnside Park) and five other properties in Victoria (Craigieburn, Drysdale, Mernda, Oakleigh South and Torquay).
Because Australia is a larger market, the success and speed of Summerset’s ramp-up in Australia will be a major driver of growth in the medium to long term – and that will also bring the company to the notice of more analysts and eventually, investors.
Coverage of Summerset is minimal, but right now, broker Macquarie has a price target on the stock of NZ$14.53; which is 32% above where it closed on Friday on the New Zealand Exchange (NZX), at NZ$10.98. At the current exchange rate of NZ$1.09 to the Australian dollar, Macquarie’s price target of NZ$14.53 would equate to $13.30, compared to the current ASX market price of $10.20. For the patient investor, that implies a prospective return of more than 30%. And Summerset is a dividend payer, to augment that; but with the caveat that Australian resident shareholders are not entitled to a tax offset for New Zealand imputation credits which are attached to dividends paid by a New Zealand company.
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