Aged care providers such as Japara Healthcare Ltd (ASX: JHC) have been battered in the wake of a Royal Commission into aged care but are they now cheap and ripe for the picking?
There is no doubt that an aging population will provide a powerful tailwind for businesses that cater to the growing pool of retirees.
However, is soaring demand enough to ensure a successful investment?
From their highs in late 2015, ASX-listed aged care providers have been horrid investments for their shareholders. Regis Healthcare Ltd (ASX: REG) is down nearly 50%, Estia Health Ltd (ASX: EHE) close to 60% and Japara almost 70%.
What may cause confusion to some investors is that this has occurred at a time when demand for their services has grown rapidly.
The Royal Commission has certainly been a big drag in recent times, but their share prices had been on a fairly constant decline for some time before that became an issue. So what gives?
The Dynamics Of Supply & Demand
The problem is that increasing demand is only half the story and needs to be paired with increasing supply. Rapidly increasing demand does not automatically translate into easy profits, just ask long term shareholders of airlines in the mid 20th century or internet companies during the early 2000s.
In the case of the internet, it was obvious that demand was going to grow exponentially, and sure enough, it did, but the vast majority of companies that attempted to take advantage of the trend never made a single dollar in profit.
One of many lessons from the dotcom boom and bust era was that a booming industry does not guarantee the success of its constituents.
The beauty of capitalism is that a booming industry naturally attracts a lot of capital investment which creates competition and places downward pressure on prices. This is good news for consumers but means many early investors will lose a lot of money.
Uncertainty of Government Regulation
The aged care sector in Australia is highly regulated and the government pays for a large portion of the revenue earned by the aged care companies. There has been a shift to providing subsidies to consumers in an effort to make in-home care a more attractive option and thus reduce the financial burden on the healthcare budget.
The thing is, just how government policy and funding will change in the future is anyone’s guess. My guess is it’s likely to look different depending on which party has power at any one time.
For investors it’s difficult to make large investments when the success or failure of such an investment will depend so heavily on forces outside the control of the company’s management.
What I Am Doing
I don’t currently own any aged care providers in my portfolio, but despite my reservations, I would be interested in buying at the right price. On Thursday, the interim report from the Royal Commission into aged care will be released, which is likely to give an insight into potential reforms going forward.
The recommendations made could have a material impact on share prices and I will be looking to take advantage of any mispricing that may result.
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At the time of publishing, Luke has no financial interest in any of the companies mentioned.
