Aged care stocks plunge on government fee change

September 5, 2016

Shares in the three largest ASX-listed aged care operators have slumped following new guidelines by the federal government for charging certain service fees from residential aged care customers.

By 1315 AEST, shares in Estia Health were down 21 per cent to $2.49 each, Japara Healthcare lost 20 per cent to $1.63, while Regis Healthcare fell 16 per cent to $3.72 each after analysts sharply downgraded price targets on the stocks.

Australia's Department of Health on Friday outlined several payments that would not be permissible under the aged care legislation going forward. Photo: Rob Homer

Australia's Department of Health on Friday outlined several payments that would not be permissible under the aged care legislation going forward. These include fees that do not provide a direct benefit to the resident, or where the services are part of the normal operation of an aged care home.

"The department is aware that an increasing number of providers have been charging, or proposing to charge additional services fees, including 'capital refurbishment fees', 'asset replacement contributions' and similar other fees," it warned.

Analysts estimate that the major operators in the sector currently charge fees of $15 a day under the guise of similar capital charges, and the new guidelines are likely to directly impact earnings.

"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," Bank of America Merrill Lynch analyst William Dunlop said in a client note.


The brokerage slashed its 12-month price target on Estia Health to $2.75 a share from $3.35, on Regis to $3.70 a share from $4.30, and to $1.90 a share for Japara from $2.30 now.

Aged care operators have been under 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 had outlined a $1.8 billion funding cut and increased scrutiny for the sector in the 2016/17 budget.

Estia, the largest operator in the sector, last week missed guidance on net profit and earnings. Shares in the company have since slumped more than 50 per cent on concerns of weaker earnings and increased debt on account of recent acquisitions.

Estia founder Peter Arvanitis last week abruptly resigned from the board and sold off his entire stake in the company, following the results announcement.





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