The Japara Healthcare Ltd (ASX: JHC) share price is currently down 2.1% after receiving a downgrade from a broker.
Japara is one of Australia's largest aged care providers, along with Regis Healthcare Ltd (ASX: REG) and Estia Health Ltd (ASX: EHE).
Macquarie Group Ltd (ASX: MQG) downgraded Japara to neutral from outperform and cut the price target by 17% to $1.86, which is slightly higher than the current price of $1.84.
The aged care sector has gone through a tough time over the past couple of years with the government not increasing the aged care funding instrument (ACFI) in FY18. However, the ACFI will start to be increased again soon.
Japara also has to repay the capital refurbishment deduction that it was charging residents, which will cost around $4.65 million in total.
The government recently increased funding for home-care packages, to keep residents out of expensive acute care. This could be a negative for Japara in the long run if the government continues to focus funding on this area.
However, Japara believes there are several reasons to be positive about its future. Japara says it's more cost efficient to fund aged care rather than hospital beds. Government funding for the industry is growing at around 5.2% per annum and could reach $14.6 billion by FY21.
The population of over-85s is projected to double by 2032 and residents will need more care as the average entry age increases. That's why Japara is looking to add around 1,200 new operational places by the end of 2021.
Foolish takeaway
I can understand why Macquarie downgraded Japara, its FY18 result could be pretty uninspiring. However, by FY22 its profit could have grown significantly, which could make today's share price of $1.86 attractive.
It's a higher risk choice considering the government is heavily involved in the funding model, but I think an investment today could work well over the medium-term.
