Aged care operators took a pounding yesterday in a horror day for the sector, spreading from last week’s victim in chief, Estia Health (EHE).
Shares in Estia, and rivals, Regis (REG) and Japara (JHC) fell by double digit amounts following an unfavourable series of rulings by the federal government on Friday.
The move by Canberra saw aged care operators and developers, especially Estia downgraded by banks, led by CLSA and Bank of America Merrill Lynch.
The federal government clarified what fees aged care operators could charge their residents and gave examples of fees that were not permitted, such as those for; "maintenance inside and outside the aged care home", "any repairs or refurbishment of the resident’s room after they have left the aged care home" and "capital costs, asset management or replacement".
The fees are commonly referred to as “capital refurbishment fees” and “asset replacement contributions” and have been a solid earner for the companies, worth around $15 a day per customer.
In fact they have been among the fastest growing areas of revenue, and the changes from Canberra will force the operators to charge customers more to cover the cost of these services (they will not be able to recover these costs directly, though).
"We understand that the capital charges of $15 per day charged by Regis Healthcare, Estia Health and Japara Healthcare are similar to those fees examples listed above," BAML analyst William Dunlop said.
"A layman’s reading of the department of health guidance and the referenced legislation clearly suggests these types of fees are not permissible under legislation. As a result, we are removing them from our Regis, Estia and Japara earnings forecasts."
That will mean reduced earnings, in the view of BAML, which cut its price targets on Estia Health to $2.75 from $3.35, Regis to $3.70 from $4.30 and Japara to $1.90 from $2.30.
CLSA has also picked up on the government announcement on Friday.
"We note the listed operators began including the fee in incoming resident contracts effective June 2016. This throws into question whether a capital refurbishment fees can be charged,” CLSA analyst Zara Lyons said in a note to clients over the weekend.
CLSA reduced its price target on Estia to $2.87 from $4.10, Japar’s to $1.77 from $2.53 and Regis to $3.71 from $5.30, downgrading Estia to a “sell recommendation" from an "underperform", Japara to a "sell" recommendation from an "outperform" and Regis also to a "sell" from a "buy" recommendation.
Aged care operators have been under growing pressure to offset funding cuts by the federal government, which currently pays a fixed daily amount per resident plus extra funding for residents who require more attention. The government has already outlined a $1.8 billion funding cut and increased scrutiny for the sector in the 2016-17 budget.
So yesterday Japara shares fell nearly 15% to $1.74, while Regis Health cares dropped more than 16.6% to $3.70.
But Estia shares fell 11.7% to $2.78, after a 24% slump last week.
That was after Estia shares fell another 6% on Friday to $3.15.
The trigger was last Monday’s weak earnings report for 2915-16 that impressed no one.
That result saw five days of heavy selling, which took the losses for the year so far to well over 50% – now well over 60%.
That makes the stock the worst performer on the ASX 200 this year so far.
Not helping was the surprise news that company founder Peter Arvanitis had resigned from the board last Wednesday and sold his entire $55 million stake in company.
