Aged Care operators Estia, Japara, Regis downgraded: BAML

June 2, 2016

Bank of America Merrill Lynch has downgrade aged care providers Estia Health, Japara and Regis following more detailed analysis that reveal the stocks are facing zero earnings growth.

Estia, Japara and Regis develop and operate aged care facilities around Australia with more than $1 billion in property on their combined balance sheets.

However part of their earnings come from federal government grants called Aged Care Funding Instruments (ACFI) which help look after Australia's aging population.

BAML said in a note to clients that these ACFI payments may become harder to obtain.

"The impact of the Australian Government's revision to aged-care funding in its May 3 Federal budget, in our mind, the outcome is now clear."

"More detailed analysis supported by discussions with aged operators implies that the listed aged-care companies are facing zero earnings growth from fiscal 2017 through to fiscal 2019."

"We downgrade Japara and Estia to Underperform from Buy, and Regis to Underperform from Neutral."

On Monday The Australian Financial Review analysed Estia Healthcare and its future growth potential noting that there were concerns and questions about the $1.2 billion stock.

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BAML said it estimated that Estia, Regis and Japara would lose $24 per resident per day in ACFI revenue by fiscal 2019 from current rates of an estimated $182, $172 and $184 respectively - a reduction of 13 per cent. 

"In our view, only those operators with well-belowaverage accommodation prices and no additional services charges would have a chance of offsetting cuts, which is not relevant to listed operators."

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