The Estia Health Ltd (ASX: EHE) share price is down almost 4% in response to a trading update.

Estia is one of the largest aged care providers in Australia, it has been operating for around 50 years. It has 68 operational homes and 6,046 operational places for residents with over 7,000 employed staff. The state that it has the biggest presence in is Victoria, with 27 homes and over 2,100 places.

Estia’s Trading Update

Estia has said that because of Aged Care Royal Commission costs, costs of opening new homes and home closure costs, its EBITDA (click here to learn what EBITDA means) is now expected to be in the range of $92 million to $94 million.

The above guidance still represents growth of 2% to 4% of EBITDA, but it is lower than previously anticipated.

Estia also gave updates regarding other aspects. Its occupancy has been impacted by continuing adverse publicity in the sector and flu in South Australia. After the closure of Mona Vale, occupancy as of yesterday was at 93% of almost 6,000 beds.

The aged care operator is having to spend more money on staff and external support costs to meet accreditation standards and ongoing routine interactions. Mature homes EBITDA is expected to be between $86 million to $88 million in FY19 compared to $90.1 million in FY18.

Estia gave an update regarding upcoming openings. Southport opened on schedule on 23 May 2019 and Maroochydore is on schedule to open on 27 August 2019.

Most importantly of the updates given by Estia, it said that the total costs in FY19 associated with the Aged Care Royal Commission is estimated to be approximately $2.3 million.

Finally, its refurbishment program is continuing with a further five homes completed since the end of December 2018, bringing the total to 28 homes now qualifying for the Higher Accommodation Supplement. By the end of December 2019 Estia expects to have 44 out of 70 homes completed.

Is Estia A Buy?

Whilst the aged care sector clearly has impressive ageing tailwinds, I think the Royal Commission will have a negative impact on the share price and could lead to higher compliance costs going forward.

Although over the longer term it could lead to a strengthening market position for the big players like Estia.

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Disclaimer: Any information contained in this article is limited to general financial/investment advice only. The information has not taken into account your specific needs, goals or objectives, so please consider consulting a licenced and trusted adviser before acting on the information. Please read The Rask Group’s Financial Services Guide (FSG) for more information. This article is authorised by Owen Raszkiewicz of The Rask Group, which is a corporate authorised representative No. 1264179 of Strawman Pty Ltd (ACN: 610 908 211) (AFSL: 501 223).

At the time of publishing, Jaz does not have a financial interest in any of the companies mentioned.