The Productivity Commission’s recommendation to lift the retirement age to 70 further confirms the incredible cost of an ageing population – and the opportunity for long-term investors to make money from a trend that will affect our way of life in coming decades like no other.
The only trend that comes close, in my view, is the rise of Asian middle-class consumers (households with daily spending of US$10-US$100), who are estimated to grow from about half a billion in 2009 to 3.2 billion in 2030, according to research cited in the Australia in the Asia Century white paper. Another contender is the growing trend of obesity in stgeloped nations.
But even that trend is arguably not as far-reaching as an ageing population. Between now and 2050, the number of people aged 65 to 84 is expected to more than double, and those aged 85 or over will quadruple to 1.8 million, according to Treasury’s 2010 Intergenerational Report.
Obvious beneficiaries will be companies that build aged-care accommodation, provide specialist healthcare services, organise the recruitment of tens of thousands of extra aged-care workers, or life-science companies that invent technologies to help the aged. Wealth-management companies should also benefit as the retirement age is inevitably lifted and people save longer for retirement.
Some caution is needed: buying stocks only on the basis of compelling long-term trends is fraught with danger. Each company needs to be assessed on its merits and investors must decide if the valuation has already factored in medium-term growth from the underlying trend.
Caveats aside, two companies stand out as key beneficiaries from an ageing population. Cogstate, a speculative life-science company, is doing terrific work in the field of dementia. And Challenger, an investment-grade stock, will benefit from rising demand for fixed-interest investments.
Chart: Share price over the year to versus ASX200 (XJO)
Sadly, the incidence of dementia is expected to rise sharply in coming decades as the population ages. Dementia is a collection of symptoms that affect thinking, behaviour, and the ability to perform everyday tasks. Its causes include Alzheimer’s disease, vascular dementia and Parkinson’s disease.
Alzheimer’s Australia says 321,600 people live with dementia in this country and that without a medical breakthrough there will be 900,000 by 2050. It estimates one in four people over 85 have dementia and that 1.2 million Australians care for dementia sufferers.
Founded in 1999, CogState has stgeloped a test to detect the first signs of dementia, which currently has no cure. Many people live with dementia without realising it – up to 800,000 alone in the United Kingdom, according to recent reports.
CogState’s computer-based Cognigram test allows general practitioners to assess cognition in patients and identify subtle changes that could indicate the early onset of a neuro-degenerative disease such as Alzheimer’s.
Knowing they have the early stage of dementia can at least allow suffers to change their lifestyle and arrange for extra care to deal with the disease. It’s not hard to imagine general practitioners getting more people to take the test to detect potential dementia as the population ages.
Cogstate has begun to commercialise its test in Canada. Early results have impressed, albeit off a low base. Like many small life-science companies, CogState is still making losses, but it had revenue of $12.6 million in FY13, has another division that is well established, and a product in the market. It also has an important alliance with US pharmaceutical giant Merck, which is racing to stgelop a treatment for Alzheimer’s.
On my calculations, Cogstate trades on an enterprise value (equity plus debt, less cash) to sales ($12.6 million) ratio of about 2.3 times. This simplistic metric is sometimes used to judge comparative value across loss-making life-science companies. High-growth biotechs trading on an EV/sales multiple closer to 2 times are often viewed as undervalued. On this measure, Cogstate has a case to be included on portfolio watchlists, but it is for speculators, not the risk averse.
In contrast, Challenger suits long-term portfolio investors seeking exposure to the growing number of retirees who will need to invest more in fixed-interest products such as annuities.
After rallying from a 52-week low of $3.17 to $6.09, Challenger looks marginally overvalued. Morningstar’s fair-value estimate is $6. Two analysts have a sell recommendation, two have a hold, and one has a buy, according to consensus analyst estimates compiled by Morningstar.
I’ll cover Challenger in more detail for The Bull in coming weeks, but for now long-term investors should watch and wait for better value as some steam comes out of the share price.
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