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Aged care stocks have fallen as the royal commission into the sector gets underway, beginning what is likely to be a difficult period for the companies and their investors.
Japara Healthcare was the worst hit of the listed players, with its shares closing down by 5.4 per cent, while Estia Health (-4.9pc) and Regis Healthcare (-2.1pc) also posted losses.
Betting on demand from an ageing population
The three aged care providers currently on the ASX listed in 2014, following changes to Federal Government funding.
There was initial optimism around their growth prospects and a run up in their share prices, as investors looked for exposure to companies set to cash in on Australia's changing demographics.
"The average of someone going into residential aged care is in their early 80s and the ABS data shows that we'll see an increasing portion of the population in that age category, and so there's a very clear demand coming through the pipeline," said JP Morgan healthcare analyst David Low.
However, aged care providers are heavily reliant on government funding and are at the mercy of regulatory changes.
Fund manager Lincoln Indicators is advising its clients to stay away from the sector.
"The obvious industry tailwinds, including our ageing population, definitely would suggest that this would be a sector that would be a growth sector, however the reality has been very different," Lincoln Indicators executive director Elio D'Amato told the ABC.
"Rising cost pressures, increased regulation and also fluctuating revenue streams have meant it has been a very difficult to predict — and unfortunately the challenges have far outweighed any possible opportunities."
Mr D'Amato described the listed players as "finely-tuned financial instruments" and questioned whether they should be listed on the stock market.
"They're created to maximise the benefits of payments that they receive from the Government and obviously try to keep costs down in order to generate a profit," he said.
"The needs of everyday investors who focus on things such as profit margins and costs and the revenue and the like — it's very difficult for someone in the position such as an aged care provider to manage those expectations."
Shares have already taken a royal commission hit
By the time the royal commission into aged care was announced in September last year, the share prices of Estia Health, Japara Healthcare and Regis Healthcare were already well off their highs, but they had further to fall.
"Clearly after the media coverage, there is concern that care is not living up to the standards that the community expects, so not surprisingly the share prices all came off quite sharply with that news as it was considered to be a new risk factor that wasn't reflected in prices previously," explained Mr Low.
In the days following the announcement, some institutional investors used it as a buying opportunity to increase their stakes in the companies swept up in the selling.
Financial services firm Perpetual lifted its stake in Estia to nearly 13 per cent, while investment manager Pendal Group bought more shares in Japara, taking its holding to 7.4 per cent.
JP Morgan's David Low thinks its too early to determine what the outcome will be for the companies' valuations.
"We see value emerging for these companies, but it's a very uncertain period — the royal commission I think inevitably will lead to improved funding, but it may well come with increased regulation, and with that increased cost," he said.
"We'd really be looking to see how the royal commission plays out before we assess that more carefully."
Lincoln Indicator's Elio D'Amato is more pessimistic.
"The best investors could hope for, I would think, would be to maintain the position they're at, which is a significant loss unfortunately if they purchased these businesses over the past one to three years," he said.
The royal commission effect
To see the effects a royal commission can have on share prices, you do not have to look any further than last year's response to Kenneth Hayne's banking inquiry.
The big four bank share prices fell between 10 and 20 per cent over the course of 2018 and, as the royal commission unfolded, AMP's share price took much bigger hits as instances of misconduct were revealed.
Major bank shares are widely held by Australian 'mum and dad' investors, both directly and through superannuation and other managed funds.
At their recent annual general meetings, retail and institutional investors voiced their anger at the banks and delivered record protest votes against the executive pay reports of NAB, Westpac and ANZ.
With only three aged care providers listed on the ASX, the broader impact will be relatively small, but potentially even more painful for those still holding the stocks.
"The findings will most likely be just as grave and, unfortunately, that broad brush which is going to be painted over the sector will definitely hurt those investors that have been exposed to this broader theme and took that risk," said Mr D'Amato.
"Unfortunately it's going to be [a risk] that's going to be realised and it's not going to be pretty."
In a statement, the Aged Care Guild, which represents major providers including Japara and Regis, said it hopes for "a new chapter for ageing in Australia" and to "move beyond the blame game to a more productive discussion".
The royal commission's interim report is due by the end of October, with a final report to be provided by the end of April 2020.
Topics: royal-commissions, business-economics-and-finance, aged-care, stockmarket, australia
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