It is fair to say that it has been a difficult year to be a shareholder of aged care operator Japara Healthcare Ltd (ASX: JHC).
Whilst its shares have not fared as badly as the embattled Estia Health Ltd (ASX: EHE) which has dropped 62%, they are still a good 37% lower year to date. Regis Healthcare Ltd (ASX: REG) has been the best performer in the group with a decline of 29% this year.
No doubt patient shareholders have been eagerly anticipating what management would say at the annual general meeting held today. With its shares up by over 4%, it would appear as though management has convinced them that change is afoot.
Japara's chairman Linda Nicholls took the opportunity to remind investors of the opportunity that the company has ahead of it, advising that despite everything that has happened this year the "fundamentals underpinning strong demand for residential aged care have not changed."
With approximately 473,000 people aged 85 or older in Australia there is a huge market for the company to operate in. Better yet is that this is forecast to grow to over 2 million people in the next 40 years.
This should provide Japara with steady organic growth for decades to come and Nichols is understandably very bullish on the opportunity. She stated that: "It's estimated that we'll need to build approximately 76,000 additional places, costing in the order of $33 billion over the next decade alone – and that's before the bulk of the baby boomer generation have hit their mid-80's. Private sector operators, including Japara, will have the opportunity to play an important role in delivering those new beds."
It won't be all plain sailing though of course. The deregulation of a highly regulated industry will no doubt cause a few bumps. But refreshingly management has acknowledged this and says managing reforms is an on-going part of operating in the industry.
Managing director and CEO Andrew Sudholz is very optimistic on the company's future. He expects the majority of the company's growth over the medium term to come from capacity expansion with increasing revenue and earnings coming from bed expansion.
The company has a development program that will deliver approximately 1,000 bed places by 2020 and a strategy to build, own, and operate more than 2,500 beds by 2025. This program is expected to cost around $195 million and anticipated to return in excess of $200 million in capital through refundable accommodation deposits.
Earlier this month Estia Health shocked the market by revising down its earnings guidance. In light of this investors could be forgiven for fearing that Japara might follow it today. But pleasingly Mr Sudholz reaffirmed FY 2017 guidance and continues to expect earnings before interest, tax, depreciation, and amortisation growth of approximately 11%.
I'm not at all surprised to see Japara's share price jump higher today. Its shares may not be dirt cheap like Estia Health, but at 17x full year earnings I feel they are good value.
Aged care will always be a tricky area to invest in, but I think at the current price patient investors could find solid long-term gains with Japara.
